If you want to buy an ETF (exchange traded fund) or a stock online, it is important to learn about market orders. Unlike mutual funds, ETFs change their price throughout the day so you have to “trade” ETFs and place an order which will get the best price available at that time.
This is the default order “type” when you place an order with a brokerage. If you place an order to buy an ETF – the order will go onto the electronic “trading floor” and will be matched up with some other investor who is selling the same ETF. The market order gives no control over the price.
Market order example
You decide to buy 100 shares of VTI (Vanguard Total Stock Market ETF). It is currently trading for $37. If you place the order as “market” then the electronic trader will match up your ‘buy’ order with some other “sell” order at a similar price and the transaction will be completed. This works very well for ETFs that have a high trading volume since there are always lot of buy and sell orders so your price should be pretty close to the last quote.
The problem is if you buy a ETF that doesn’t have a lot of trading volume (also known as “thinly traded”), it might be difficult to complete the trade. Even though the last quote might be $40, it’s possible to end up with a price that is much higher if that is the only trade available.
It is also possible to enter trade orders after hours when the stock exchanges are closed. I would recommend you don’t do this – however, if you do then please use a “limit” order which will be discussed in the next post.