The limit order is a valuable tool you should probably be using on nearly every trade. If you're not familiar with the concept, a limit order basically lets you specify the price at which you want to buy or sell a stock. This can be higher (in the case of selling) or lower (in the case of buying) than the most recent market price. If anyone is willing to buy or sell at your limit order's price during the trading day, it will be filled. Limit orders can be set to expire at the end of the day or only when you manually cancel them ("good until canceled").
You can use limit orders to automatically buy or sell a stock when it reaches a target price. For example, if you've decided that TOL is risky above $105, you might put a sell limit order in at that price. If you think SHLD is a bargain at $140, you could put in a buy limit order at that price. Mark 'em "good until canceled" and if TOL should ever go above $105, it'll be sold; if SHLD should ever plunge below $140, it'll be bought. "Good until canceled" means just that: the order could be executed today, tomorrow, next week, next month, next year -- or in fifty years -- as long as you don't cancel it. This can be a risky; if SHLD falls below $140, it could mean that the company has just announced some terrible news and is no longer a good investment, or it could just be normal volatility. So you have to follow the companies on which you've placed buy-side limit orders carefully and cancel or change your order as situations warrant.
Even if you've decided to trade a stock at market price, you can still use a limit order to get a slightly better price than you might otherwise, if you're willing to wait a few minutes. The prices of most stocks fluctuate by a few cents pretty much continuously as the supply/demand curve shifts, even if the price isn't moving much from day to day. So you can often hit a better price than the one you just were quoted by putting in a lowball limit order. I did this on all three stocks I bought today and saved at least a nickel a share on each purchase. The trades were executed anywhere from five minutes to an hour later. (SHLD was the laggard; it had just started to move up as I decided to place the order. But it fluctuated back down later. It fluctuated even lower after my order was filled; I should have been a bit more aggressive with the limit.)
Limit orders are also essential if you trade after hours, because some traders will offer to sell at ridiculously high prices or to buy at ridiculously low prices in the hope that at some point their oddball order will be the highest bid or lowest asking price. This is much more likely during the low-volume after-hours session than during the trading day, and especially with thinly-traded stocks. If this happens, anyone who naively issues a market order will pay way more than they should to buy the stock, or get way less than they should on a sale.
Note that a limit order is not the same as a stop-loss order, which automatically sells a stock if its market price dips below a specified level. If a stock is trading at $50 and you issue a limit order to sell it at $40, the order will be executed immediately at $40 because such an order is essentially an offer to sell at $40, and what moron woludn't snap up a stock that's selling on the market for $50 at a 20% discount? You'll be able to buy your exact shares back within seconds, no doubt -- at $50.
The nice thing about Scottrade is they charge the same price for limit orders as for regular market orders. And no, you don't pay the commission until the order is filled; however, your transaction amount is removed from your tradeable cash while the order is in effect. You can change or cancel limit orders anytime, although there can be a lag in doing this, so sometimes your order might get filled before your change or cancellation reaches the market if your limit is close to market price. Once you understand the caveats of limit orders, though, there's really no excuse not to use them all the time.
Posted by kindall at July 8, 2005 06:42 PM