What Does At-The Market Mean?
Exchanges have facilitated highly convenient securities trading. You can enter or exit a trade as per your conviction of price levels. Generally, a client informs their broker to buy or sell the exact number of shares at their desired price. However, the total or partial execution of the order depends on the availability from the counter side. While some investors can purchase or sell at any price, others prefer to do so only within a price range.
The stock exchange’s offerings can be of different types. In this article, you will know what is at-the-market offerings in detail.
A type of market order that instructs the broker to execute the transaction in the capital markets at the best available price is called the at-the-market order. An at-the-market offering is processed at the prevailing price of the buy or sell order. Typically, investors request this kind of market order from their brokers.
Another type of Investors using market orders has no time to watch the market and “time” their trades. While at-the-market orders guarantee execution, they may come with a downside risk of paying a higher price for the security.
An at-the-market order executes quickly and can be placed at any time during market hours. The orders received after the stipulated time get filled instantly on the next market reopening date.
An at-the-market participant emphasizes prompt execution, in contrast to an exact rate to buy or sell, as is the case in a limit order. Often in a bull market, buying orders for certain securities remain unexecuted even when the investors are willing to pay a premium price for it. Similarly, in the bear market, orders with sell limit orders are left pending. Investors lose potential profits in both scenarios.
Advantages of At-the-Market
Ideally, an at-the-market order is appropriate for investors interested in facilitating an investment decision regardless of potentially losing money. It functions as a default setting for most investors as the order fills faster.
An at-the-market order is most functional in large trades executed in a limited time. One such urgency to complete an order could be, an investor looking to receive a dividend. In this case, the investor would like to buy the security before the ex-dividend date, so instead of waiting for a particular price, the broker buys it at the prevailing rate irrespective of being expensive.
Another circumstance where at-the-market order is beneficial is when the investors cannot keep track of the market and wait for the limit order to execute. Typically, at-the-market order is less damaging if the trades involve blue-chip securities since a sudden price change is unlikely. Risk increases as the trades involve more illiquid securities. Lesser liquidity makes the investment less reliable for at-the-market orders.
Disadvantages of At-the-Market
Since at-the-market orders execute at the prevailing prices, an investor can be deprived of the bid-ask advantage. A bid-ask spread is a difference between the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept.
Circumspection before placing At-the-Market order
A trade can prove to be expensive if you do not consider the bid-ask spread before placing the market order, especially for riskier investments. People using automated trading systems (ATS) should be extra cautious to avoid paying a higher price and realizing negligible profits.
Investors must be particularly cautious while putting an at-the-market order for small-cap securities with lower liquidity. Illiquid securities generally incorporate a huge bid-ask spread.
Market Order vs. Limit Order
Market orders or at-the-market orders are the most basic type of trade that provides no discrete pricing control to the investors. Limit orders, on the other hand, give a greater advantage to investors.
Market orders possess no upper or lower price limit to fill the trade, imposing greater risk. A limit order enables an investor to set a cap at the acceptable purchase price or a floor price to sell a particular security. A limit order reduces the risk to the investor and the order executes only if the security hits the desired price.
Example of At-the-Market
Suppose the bid price of a share of Ambuja Cement (AMBUJACEM) is INR 355 and the asking price is INR 357, with 100 shares available at ask. If an investor requests its broker to purchase 500 shares at-the-market price, the first 100 shares are bought at INR 357. The remaining 400 shares are purchased at the next best ask price for the sellers.
Frequently Asked Questions Expand All
Ans: An at-the-market order executes the trade at the prevailing market price. An at-the-market order emphasizes completing the order irrespective of the price.
Ans: A market order completes the trade at the prevailing prices without any price limits whereas a limit order gets executed only within the stipulated price range.
Ans: The pros of an at-the-market order are that they execute at once without the need to keep track to time the trade. It is good for investors requiring execution within a certain period.
Ans: According to the definition of at-the-market order, it executes as soon as it is placed at the prevailing prices, depending upon the availability of the shares.
Ans: Market orders placed during trading hours are promptly executed. Market orders placed beyond trading hours are executed as soon as the market opens the next day.