Stock prices fluctuate without stopping, moving up or down in just seconds or minutes. Such unpredictability makes it challenging for investors to determine an excellent price in the stock market.
Luckily, limit orders are designed to help them buy or sell shares at their chosen price within a specific timeframe.
Understanding Limit Order
A limit order is an instruction from you to your broker to buy or sell shares at your preferred price within a set period of time.
The buy limit order enables your broker to buy only the shares once the stock is below the specified price, also called the limit price. On the other hand, the sell limit order enables your broker to sell shares once the stock is above the limit price.
The period for your limit order will be up to you. Usually, investors set their limit order period for 24 hours or a month. Having a specific timeframe for your limit order is important since that determines how long your trade should be executed at your chosen price before the limit order expires.
Note that it is uncertain whether the stock you’re looking to buy or sell will hit your set limit price. Still, that doesn’t mean you don’t need a limit order. In that situation, having a limit order keeps you from buying or selling at a price above or below your preferred level.
Ideal Times to Use a Limit Order
Here are a few scenarios where using a limit order is a good thing to do:
When Trading a Huge Number of Shares
Limit orders can come in handy when you’re dealing with plenty of shares as they can protect you from experiencing negative slippage or receiving a value less than you expected, leading you to a loss.
With a limit order, you have a good idea of the amount you need to pay for the number of shares indicated in your order.
When Getting a Better Price
Another excellent time to use limit orders is when you buy or sell shares at a certain price.
For instance, if you expect the stock to fall below $500 per share, you can set a limit order to purchase shares at $499. As a result, your order would only register if the stock price hit the $499 threshold or lower. But if it doesn’t, your order will not go through.
When You Don’t Time the Market
Limit orders are perfect for making market players stay objective in their trading.
If you’re the type of trader, who doesn’t keep an eye on or is not trying to time the market, placing limit orders will be good for you. That way, you can focus on other matters without worrying about buying or selling shares at the wrong time.
When Trading Low-Volume Stocks
Limit orders can also help with your buying or selling of stocks that don’t trade regularly.
Let’s say you plan to purchase shares of a firm with a low volume. If you place a limit order to buy the shares of that company, you are likely to get the price you’re aiming for without spending a great deal of your time waiting for your order to process.
