At The Market

An at-the-market order buys or sells a stock or futures contract at the prevailing market bid or ask price at the time it gets processed. An at-the-market order usually executes within minutes of being received and can be placed anytime during market hours. If received after regular market trading hours, this order type gets executed as soon as the market reopens.

At-the-market orders are typically used by investors to assure that the desired transaction takes place immediately. When an investor places an order at the market, he or she is willing to forgo an execution at the best possible price for the speediness of entry or exit to or from a stock.

During extreme bull markets, buy limit orders (orders that only trade at the limit price or lower) often don't get executed as investors are prepared to pay a premium for stocks they want to purchase. Likewise, sell limit orders (orders that only trade at the limit price or higher) often remain unfilled during bear markets when prices gap lower. Both scenarios can cause investors considerable angst when trying to deal. (For further reading, see: Introduction to Order Types.)

Investors who execute a trade at the market are subject to paying higher prices than necessary, particularly when trading small cap stocks. These stocks are often illiquid and have wide spreads that are several basis points away from the last sale price. For example, A stock that only trades several thousand shares a day may have a bid price of $2, an asking price of $3 and last sale price of $2.15. When trading stocks with a wide bid/ask spread, investors should use the last sale price as a reference point to determine if placing an at-the-market order is appropriate. (To learn more, see: The Risks of Trading Low-Volume Stocks.)

Investors can use an at-the-market order to complete a large trade that needs to be filled by a specific date. For instance, A fund manager might need to complete a trade before a stock goes ex-dividend to receive the distribution. Any portion of the order that was on a limit and not executed can be completed by using an at the market order, albeit at a higher price. At-the-market orders are also useful for investors who do not have time to watch the market and wait for a limit order to execute.