When you're handling your stock market deals, there are various methods to help you gain profits or cut down losses. One handy tool is known as a "limit order." This tool lets you manage how much you spend or earn in a trade by setting specific points. These points trigger an automatic stop or execution of the trade. Many investors consider the limit order as a crucial and helpful tool for achieving success in their investments.
Limit orders work for buying or selling stocks, and they have the same purpose but on different sides of a trade. They're named "limit" because they set a specific price you're willing to pay or accept for a stock. It means you're telling the market you'll buy or sell only at that price or even better terms for you.
Buyers use limit orders to avoid paying too much if stock prices suddenly rise. Sellers use them to avoid selling for too little if prices suddenly drop.
In a market order, a broker carries out your buy or sell right away, no matter the price. If you're new to trading and using default settings on brokerage apps, you're probably placing market orders.
For stable stocks with lots of trading, market orders often happen close to the expected price. But, if stocks are unpredictable and not traded much, prices can change quickly. This means you might end up paying more than you thought when buying or getting less when selling.
Remember, with limit orders, they may or may not be at the top of your broker's list for execution. If your limit order has the best price, it gets filled quickly. If not, it joins the line with other orders at different prices. As other orders are completed, yours might move up. However, orders with prices closer to the current market rate could come in and push yours down.
Even though limit orders have some drawbacks, some people see them as a trader's reliable companion because they provide specific guarantees. Your order will only be completed at the price you set or even better.
When making a trade, your broker will request you to provide details for five things, and this is where you indicate the trade as a limit order. These components include:
Imagine you want to buy 100 shares of XYZ stock, and the most you're willing to pay for each share is $33.45. You'd use a limit buy order, saying something like: "Buy 100 Shares XYZ, limit 33.45."
This order tells the market you're up for buying 100 shares of XYZ, but you won't pay more than $33.45 for each share.
Limit orders aren't strict. Your order won't be filled if the price is above $33.45, but it can be filled if it's below—which is good for you. If the stock price drops below your limit before the order is filled, you might end up paying less. On the flip side, if the price goes up and doesn't reach your limit, the trade won't happen, and the money stays in your account.
The process is the same for a limit sell order. If you set a limit sell order at $33.45, it won't be sold for less than that price. It would look something like this: "Sell 100 Shares XYZ, limit 33.45."
In simple terms, your stock won't be sold for anything below $33.45 per share. If the stock price goes higher before your order is filled, you might get more than your limit price. If the price drops and your limit isn't reached, the sale won't happen, and the shares stay in your account.
Knowing where to set limit prices takes practice. If you set limit buy orders too low, they might never go through, and that won't help you. The same goes for limit sell orders. With some experience, you'll figure out the right spot that gets you a good price while ensuring your order actually happens.
Using a basic limit order can be tricky if you're not keeping an eye on the market. For instance, let's say you set a $30 sell limit order for XYZ stock and then go on vacation for a week. When you check your portfolio the following Monday, you see that your limit order went through. You made a small profit from the sale, which is great, but now you notice that the current price for XYZ is $45.
Here's what happened: While you were on vacation, XYZ became a target for a merger, and the stock price shot up. Your order went through at $30 that day, but the price kept going up due to rumors of a profitable merger. If you were keeping an eye on the market and reading news updates, you could have canceled your order before it happened and set a new one with a higher limit.
Now, think about the opposite scenario: The stock plummeted because of bad news while you weren't paying attention, and your buy limit order got filled as the stock was in a steep decline.
Limit orders are useful but not foolproof. While they shield you from big losses, they might also prevent unexpected gains. In a market with lots of ups and downs, limit orders, like the example mentioned earlier, could make you miss out on extra profits or shares because they might execute too soon.
If you're buying or selling a stock, set a limit on your order that's beyond daily price changes. Make sure the limit price is at a point where you're okay with the outcome. This way, you have some control over the price you pay or receive.
A stop-limit order is like a combo of a stop-loss order and a limit order. When the stop price is reached, a limit order kicks in. You can use these for buying or selling. For instance, you might set a stop-limit buy order with a stop at $10 and a limit at $9.50. If the stock falls to $10, your broker will automatically place a limit order at $9.50. There's also something called a trailing stop-limit order, which combines a trailing stop-loss order with a limit order.
You get to decide how long your limit order stays active. You can set it for a day, a week, or keep it open until it goes through. There are also "fill-or-kill" orders, which either happen right away or not at all.
If your order isn't going through, it's likely because your broker can't get you the price you specified. Market orders take priority, so you might see your limit price mentioned by your broker before your limit order happens. Market orders go first, and if there are still enough shares or buy orders to fill your limit order, then it goes through. This delay is more likely with low-volume stocks that don't have many shares available for sale at a given time.