Here is a common mistake way too many novice investors or traders make when placing an order at market prices. Generally speaking, there are two common order types. What we are talking about is a Market Order versus a Limit Order.
I love going to Investopedia for quick definitions. A market order is an order "to buy or sell a security at the best available price in the current market". While a limit order a type of order to purchase or sell a security at a specified price or better.
While there exists many other orders out there such as stop order, trailing stops, bracket and many more. But the most basic two are market and limit orders. So the topic of discussion is not about these other various orders, so we will skip them and go right into market orders.
Reason #1 : You will get a bad fill in fast market.
It's not uncommon for a stock to move really quick at any given time. I have seen stocks move up or down in a matter of splits seconds when a news is released or perhaps a rumor is published online. Algo trading that picks up the the news will instantaneously move the prices up or down. If it happens that you are submitting a market order to get the best available price, it may work against you.
Tesla stock running up from $405 to $430 at the market opening
Reason #2 : Don't get your order stuck in a trading halt
You would be surprise how many times I have seen clients getting their market orders stuck when there is a trading halt cause by some pending news or if the market is seized up in a circuit breaker or flash crash. That is the last thing you want to feel : being helpless that your orders are stuck in limbo until trading resumes.
Reason #3 : Get bad fills from lack of liquidity
Particularly this year, we have see a barrage retail and novice investors getting into the stock market chasing after the hottest small cap or penny stocks. Often as they are, emotionally charged, trying to chase after the fast moving stock by jumping on the bandwagon with a market order. On these days, we may see volumes hitting in the millions of shares traded. Unfortunately, just as quickly as they come, so goes the liquidity. A market order for a few thousand shares of some penny XYZF stock will certainly drive up or down the prices.
Penny stocks traders are not the only guilty ones for using market orders but we do see many dividend-hungry clients buying less popular / traded stocks such as preferred shares or ETFs where only a few hundred or thousands of shares traded daily getting a bad fill with a market order.
Avoiding Market orders and start using Limit orders
When I first learned this trading mistake over some 20 years ago, I have never used a market order since. Just stick with a limit order! Using a limit order with a broader price limit will and can act like a market order but it gives you an added protection of getting bad fill or getting your order stuck if there is a trading halt or a fast market.
The number one reason why most investors use Market order is simple: Laziness. Yes 9 out of 10 times, it will work out just fine. But it takes that one incident and you will be looking into real losses in the hundreds or thousands of dollars.