Using Limit Orders When Buying or Selling Stocks

How Limit Orders Work

Limit orders are extremely important tools when trading in the stock market; they help you control the amount you spend or earn by placing limits on the trade. Many buyers and sellers may find limit orders to be one of their most important and useful tools for achieving success in investing.

Placing a Limit Order

When carrying out any trade, your broker will ask you to specify five elements, which is where you can define the trade as a limit order. These elements are: type of trade (buy or sell), number of shares, the security you want to buy or sell, order type (where you will specify that this is a limit order rather than a market order or another type of order not covered in this article), and price.

Limit Buy Order

For example, if you want to buy 100 shares of a stock that costs $33.45 per share, in this case, you would use a limit buy order, and it would be expressed as follows: Buy 100 shares of stock with the symbol XYZ, limit 33.45.

Limit Sell Order

The trade works the same way for a limit sell order. If you enter a limit sell order at $33.45, your stock will not be sold for less than this price. The order would read: Sell 100 shares of stock with the symbol XYZ, limit 33.45.

Benefits of Experience

Some experience is required to know the appropriate limit price levels. You may place limit buy orders too low, which could lead to them not being executed and not yielding any benefit for you. The same rule applies to limit sell orders. With some experience, you will find the point at which you get a good price while ensuring that the order is actually filled.

Example of a Potential Problem

Simple limit orders may pose a problem for traders or investors who do not closely monitor the market. For example, suppose you entered a limit sell order at $30 for stock XYZ before you took a week off. You check your portfolio the following Monday and find that your limit order has executed. You made a small profit from the sale, and you are happy about that. But you discover that the current price of XYZ is $45.

Conclusion

Limit orders are excellent tools, but they are certainly not without flaws. The same function that protects you from severe losses can prevent you from achieving unexpected gains. In a highly volatile market, limit orders like the example above can result in missing out on additional profits or shares, as they may execute at an inopportune time.

Frequently Asked Questions (FAQs)

What is a stop limit order? A stop limit order combines a stop-loss order and a limit order. Once the price reaches the specified price, the limit order will be executed. It can be placed on both the buy or sell side. For example, you can set a stop limit buy order at $10 and a limit at $9.50. Once the price drops to $10, your broker will automatically place a limit order at $9.50. A stop order can also combine a trailing stop with a limit to form trailing stop limit orders.

How long does a limit order last? You can choose the duration you want the limit order to remain open. You can set it for one day, a week, or leave it until it is executed. There are also fill-or-kill orders that are executed immediately or not at all.

Why isn’t my limit order executed? If your order isn’t executed, it’s likely that your broker cannot achieve the price you want. Market orders are filled first, so you may see the limit price being quoted by your broker before your limit order is executed. Market orders are filled first, and if there aren’t enough left to fill your limit order, your order will not be executed. This type of delay is most likely to happen with lower-value stocks and weak trading volumes that don’t have many shares available for sale at a given moment.

Source:
https://www.thebalancemoney.com/using-limit-orders-when-buying-or-selling-stocks-3140523