Stock Trading Limit Orders Explained

Most people will agree that they feel like they are paying too much for gas, food, clothing, and other everyday necessities. With daily expenses going through the roof, who can afford to overpay for stock? The stock market has gone through a rough cycle this past year, but with inflation on the rise and savings account rates down in the gutter; stocks look very appealing right now. As you enter the world of trading, you will quickly come across a whole new lexicon an entire sublanguage that you must master in order to make your money work for you. One crucial term in that lexicon is “Limit Order.”

In this article, I’m going to break down the explanation of Limit Orders into four short and straightforward parts:
1. A quick definition
2. Why you need to know this
3. How to use a Limit Order
4. (and probably the most important part) How to use Limit Orders to make money

The first part of the explanation is easy to cover. A Limit Order allows a buyer (you) to set your own price for a stock. In other words, I can place a Limit Order for Citigroup at $21 when the stock is currently going for $24. If the price of Citigroup drops to $21 or lower, my brokerage firm will then, and only then, will buy it for my portfolio.

Many beginner investors aren’t familiar with Limit Orders, and most individuals building their own portfolio may never place a Limit Order. However, the smart investor does use this tool. On the stock exchange, prices for stock are constantly changing by the time an individual investor tracked the targeted stock throughout the day until it hit a price he would like to buy at, then got in touch with his broker, then placed the order, and then waited for the broker to buy the stock, it would no longer be available at his desired price. And, as previously mentioned, overpaying for a stock just doesn’t make any sense. You need to know what Limit Orders are in order to increase the chances of getting a stock for a price you are comfortable with, especially in today’s volatile market.

Using, or placing, a Limit Order is relatively simple. If you call in to place your order, simply tell your brokers: “I would like to buy X number of shares of Company Y with a Limit at $Z.” If you buy stocks online: on the order page select “Limit” and then enter the price you would like to buy at. With Limit Orders, your order may sit for awhile as the brokers wait for the stock to reach your targeted price. You should be warned that if the stock never reaches or dips below your Limit, then the order will not be executed. When placing a Limit Order, you will have to decide if you want it to be a Day Order (executed by 4PM EST. that day or cancelled) or GTC, Good Till Cancelled (the order is outstanding until you choose to cancel it). When deciding between these two options, it is entirely up to you as the investor whether or not you will still want the stock at a later date at the price you set today.

Limit Orders are relatively simple to place, but they can payoff in a big way. Especially in volatile markets, a Limit Order can help a speculator buy a solid company at a cheap price. Many companies go through turbulent cycles throughout the day that can lead to an unusually low stock price for a minute or two. By placing a Limit Order, you will get first dips on those low prices (as long as it’s within your Limit), and you will not have to be tied to your computer to watch for the dip your broker will take care of that for you. The result is similar to going to outlet stores you’re getting the exact same brand for a cheaper price. Limit Orders are especially useful if you have an intuition for a stock or certain market, but can’t constantly track it. If you think a company is overvalued and may dip soon, you can place a Limit Order GTC (Good Till Cancelled) and still enjoy your vacation and time away from the computer.

Limit Orders are a crucial tool to have under your belt. They can help you find good deals on the stock market, lock into a company at a reasonable price that you determine and they free you from constantly monitoring the price, allowing you to enjoy the rewards you can reap from effective investing. And with today’s pendulum-swinging market, control over prices is quite enviable.

*I do not publicly endorse any of the companies or mechanics mentioned above investors take on sole responsibility for their decisions.*