When to Use Limit Orders for Stock Investing - dummies (2024)

FAQs

When to Use Limit Orders for Stock Investing - dummies? ›

Investors who aren't in a hurry can use a limit order to try to get a better price when they decide to sell. For example, maybe you own a stock whose price is at $50 and you want to sell, but you think that a short-term rally in the stock is imminent.

Investors generally use limit orders when they have a target entry or exit price and are willing to wait for the market to move in their favor. Let's say, for example, that a stock is currently trading at $55, but an investor believes it'd be a good value at $50 or less.

A limit order is an order to buy or sell a certain security for a specific price or better. For instance, if you wanted to purchase shares of a $100 stock at $100 or less, you can set a limit order that won't be filled unless the price that you specified (or better) becomes available.

Limit Order Disadvantages

Because limit orders are bound by prices, you don't know for certain that your trade will ever be executed. A given security may never cross the threshold you indicate.

A buy limit order ensures the buyer does not get a worse price than they expect. Buy limit orders provide investors and traders with a means of precisely entering a position. For example, a buy limit order could be placed at $2.40 when a stock is trading at $2.45.

A limit order gives a trader more control over the execution price of a security, especially if they are fearful of using a market order during periods of heightened volatility.

In a limit order, the investor has to specify a quantity and the desired price at which he or she wants to make the transaction. Say a share is currently trading at Rs 100 per share but the investor wants to buy it at Rs 95 per share. A limit order of say 10 shares at Rs 95 per share is placed.

A stop order, also referred to as a stop-loss order is an order to buy or sell a stock once the price of the stock reaches the specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price.

The Bottom Line

Investors can use two common types of orders to buy or sell stocks: market orders and limit orders. Market orders often execute right away at whatever price the market is charging. Limit orders won't trigger until the market price meets whatever price the investor is looking for.

You can choose a timeframe for your limit order, typically a period lasting as little as 24 hours or as long as a month. That means your limit order will execute a trade at the limit price only within a set period of time, after which it will expire. Let's say you want to buy Apple (AAPL) stock.

Is it better to buy at market Open or Close? ›

The opening period (9:30 a.m. to 10:30 a.m. Eastern Time) is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time. A lot of professional day traders stop trading around 11:30 a.m. because that is when volatility and volume tend to taper off.

Between 9:00 AM to 9:15 AM is when the pre-market session is conducted on NSE. During the pre-market session for the first 8 minutes (between 9:00 AM and 9:08 AM) orders are collected, modified or cancelled. You can place limit orders/market orders.

Market orders are best used for buying or selling large-cap stocks, futures, or ETFs. A limit order is preferable if buying or selling a thinly traded or highly volatile asset. The market order is the most common transaction type made in the stock markets.

If you trade online, the option to place a limit order should be grouped in a "trade" or "place order" tab with other options, such as placing a market order. If you trade using an actual broker, simply tell your broker that you would like to place a limit order.

Limit orders may cost more and command higher brokerage fees than market orders for two reasons. They are not guaranteed so if the market price never goes as high or low as the investor specified, the order is not executed.

Understanding Good Through

Typically, a good through order is a stop loss or limit order that remains valid until the expiration date passes unless the order is executed, canceled, or amended. A special case would be a good 'til canceled (GTC) order which is good until the investor specifies it is not.

Investors who want to buy and sell securities immediately place market orders while those who place limit orders are concerned with buying and selling their assets within a certain price limit. Because of their complex nature, limit orders tend to be more costly.

A day order is a stipulation placed on an order to a broker to execute a trade at a specific price that expires at the end of the trading day if it is not completed. A day order can be a limit order to buy or sell a security, but its duration is limited to the remainder of that trading day.