An accredited investor must meet specific financial criteria, and have the necessary experience to be accredited. Some investments are limited to only accredited investors.
There are two major categories of accredited investors: individuals and legal entities, which can include trusts, limited liability companies, and businesses.
Businesses like banks, investment broker-dealers, insurance companies, and pension or retirement plans are common examples of accredited investors.
Further, some private investment firms may follow legal guidelines that allow only the participation of accredited investors: i.e., those who meet certain net worth or income criteria as determined by the Securities and Exchange Commission.
Key Points
Owing to the complexity and risk some investments carry, they’re only available to accredited investors, not ordinary retail investors.
An accredited investor must meet specific financial criteria in order to invest in certain products.
Generally, an accredited investor must have $200,000 in income ($300,000 if married), or $1 million in net worth, excluding their primary residence.
Accredited investors may be individuals, but can also be trusts, institutions, and other entities.
The accredited investor designation protects main street investors from undue risk, and allows some companies to skirt SEC rules.
The Accredited Investor, Defined
Many private placement investment firms — some of which may take on a high level of risk, use complicated investment products and strategies — require investors to be accredited in order to circumvent the SEC’s legal requirements.
“One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering,” according to the SEC’s Office of Investor Education and Advocacy.
When an investment is sold to the public, it is under the regulatory authority of the SEC. (For example, a mutual fund sold to retail investors falls under the purview of the SEC.) This includes certain disclosures and extensive reporting requirements to the SEC.
Accredited Investors vs. Retail Investors
Retail investors are generally individuals who invest their own money, often for retirement, but sometimes to buy stocks online. Retail investors have to meet some basic requirements when opening an investment account, but not the stringent criteria that apply to accredited investors.
Why Companies Choose Accredited Investors
Why might an investment firm choose to limit themselves to accredited investors? For one, adhering to the SEC regulations can be an expensive and labor-intensive process. In the eyes of the law, accredited investors are more sophisticated, or may have the means to take on the risk that such investment opportunities produce.
Who Qualifies as an Accredited Investor?
For individuals to qualify as accredited investors, they must prove that they have the means necessary to take the risk involved in certain investments. This can be done in one of a few ways:
First, the individual must have earned income that exceeded $200,000 (or $300,000 if married) in each of the prior two years, and reasonably expects the same for the current year.[1]
Or they must have a net worth over $1 million, either alone or with a spouse or spousal equivalent. That does not include the value of their primary residence.[1]
Other Types of Accredited Investors
On Aug. 26, 2020, the SEC updated the qualification criteria. Individuals who have Series 7, Series 65, or Series 82 licenses in good standing can now be considered accredited investors.[2]
The SEC said this was done to allow those with knowledge and expertise to invest in private investment markets even if they do not yet meet the financial qualifications.
General partners, directors, and executives with a private fund also qualify as accredited investors.
With the recent expansion of the qualification parameters, “knowledgeable employees” of the investment fund also now qualify as accredited investors.
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How a Trust Can Be an Accredited Investor
For a trust to qualify as an accredited investor, assets must total more than $5 million, and the trust cannot have been formed specifically to purchase the investment.
The trust must also be directed by a “sophisticated” person — someone who the investment company reasonably believes has the requisite experience and ability to understand the risks associated with the investment.
As of the most recent changes, LLCs with assets of over $5 million may also qualify.
Alternatively, an entity can qualify as an accredited investor when all of the equity owners are individually accredited investors.
Because this reporting is not channeled through the SEC, investment companies typically collect the information necessary to confirm that a person is an accredited investor, or may require that potential customers sign off that they are accredited investors.
The Net Worth Requirement
One of the qualifications for being an accredited investor is to have a net worth of $1 million. How do you calculate your net worth?
Generally, individual net worth is calculated by taking a person’s assets and subtracting liabilities. Assets are things of value that a person owns, and liabilities are debts owed.
For example, imagine a person has the following assets: a primary residence, a checking account, a 401(k) retirement account, and a car.
They also have a mortgage loan and two student loans — those are their liabilities.
To determine their net worth, the individual would first total the value of the assets and then the liabilities, and subtract the value of the latter from the former.
That said, the SEC has a few specific rules about what is counted in a net worth calculation:
As mentioned, a primary residence is not to be included in the person’s net worth calculation.
A mortgage on a primary residence is also not to count in the net worth calculation, unless the value of the mortgage is greater than the value of the home.
If the mortgage is “under water,” then the amount of the loan that exceeds the fair market value of the home should be included.
When considering other real estate holdings with a spouse or spouse equivalent, it is not necessary that they be held under both names. For example, a property held by just one of the two parties would count.
How Can Non-Accredited Investors Invest?
You don’t need to be an accredited investor to begin building wealth for the future. There are plenty of opportunities for investors of every level to get involved and earn returns in the stock exchange.
It’s important to understand that all investments carry some amount of risk. It’s always a good idea for investors to familiarize themselves with the risks involved with their desired investments.
To start, investors can open an account at a brokerage or with an online trading platform to buy and sell securities like stocks and exchange-traded funds (ETFs).
New investors will want to be mindful of investing fees, as those will reduce any potential investment returns. This includes account fees, trading commissions, and the fees built into the funds themselves, called expense ratios.
The Takeaway
An accredited investor — a person or an entity — is qualified to invest in certain private investments like a hedge fund or a venture capital fund. Individuals must meet a high financial bar or have industry expertise to be accredited.
The rules for accredited investors can be seen as both protections for those investing, as well as advantageous for private investment firms.
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A market-on-open order (MOO) is an order to be executed at the day’s opening price. Investors typically have until two minutes before the stock market opens at 9:30am ET to submit a market-on-open order. MOO orders are used in the opening auction of a stock exchange.
While investors who subscribe to a more passive type of investing strategy may not incorporate MOO orders into their daily lives, they can be important to know about. You never know, after all, when you may want to place an order before trading commences.
Key Points
• Market-on-open orders execute at market opening, without price guarantees.
• MOOs have a higher likelihood of execution compared to limit orders.
• MOOs are useful for capturing immediate price movements.
• Risks involve volatility and potential liquidity issues.
• Limit-on-open orders may provide price protection.
What Is a Market-on-Open (MOO) Order?
Again, market-on-open orders are trades that are executed as soon as the stock market begins trading for the day. They may hit the order book before then, but do not actually go through the trading process until the market is opened. Note, too, that MOO orders are only to be executed when the market opens — they are the opposite of market-on-close, or MOC orders.
These orders are executed at the opening price during the trading day, or immediately (or soon after) the bell rings opening the market on a given day.
How Market-on-Open Orders Work
There may be different rules for different stock exchanges, but generally, the stock market operates between 9:30am ET and 4pm ET, Monday through Friday. Trades placed outside of the hours are often called after-hours trades, and those trades may be placed as market-on-open orders, which means they will execute as soon as the market opens for the next trading day.
An investor might place a market-on-open order if they anticipate big price changes occurring during the next trading day, among other reasons.
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Different Order Types
To fully understand how an MOO order works, it may help to first understand both stock exchanges and the different ways that trades can be executed. The latter is generally referred to as an “order type.”
Stock exchanges are marketplaces where securities such as stocks and ETFs are bought and sold. In the U.S., there are more than a dozen stock exchanges registered with the Securities and Exchange Commission (SEC), including the New York Stock Exchange and Nasdaq Stock Exchange.
Next, market order types. Order types can be put into one of two broad categories: market orders and limit orders.
Market Order
A market order is an order to buy or sell at the best available price at the time. Generally, a market order focuses on speed and will be executed as close to immediately as possible.
But securities that trade on an exchange experience market fluctuations throughout the day, so the investor may end up with a price that is higher or lower than the last-quoted price. Therefore, a market-on-open order is a specific version of a market order.
Because it is a market order, it will happen as close to immediately as possible and at the open of the market. The order will be filled no matter the opening price of investment. There is no guarantee on the price level.
With each order type, the investor is providing specific information on how, and under what circumstances, they would like the order filled. In the world of order types, these are semi-customizable orders with modifications.
Limit Order
A limit order is an order to buy or sell a stock at a specific price. A limit order is triggered at the limit price or within $0.25 of it. At the next price, the buy or sell will be executed.
Therefore, limit orders can be made at a designated price, or very close to it. While limit orders do not guarantee execution, they may help ensure that an investor does not pay more than they can (or want to) afford for a particular security.
For example, an investor can indicate that they only want to buy a stock if it hits or drops below $50. If the stock’s price doesn’t reach $50, the order is not filled.
After-Hours Trading
An MOO order is not to be confused with after-hours trading and early-hours trading. Some brokerage firms are able to execute trades for investors during the hours immediately following the market closing or prior to the market’s open.
3 Reasons to Use a Market-On-Open Orders
There are several reasons to use a market-on-open order, including the following.
Trading Outside of Operating Hours
Stock exchanges aren’t always open. The New York Stock Exchange (NYSE) and the Nasdaq Stock Exchange are both open between 9:30 am and 4:00 pm EST.
Anticipating Changes in Value
Traders and investors may use a market-on-open order when they foresee a good buying or selling opportunity at the open of the market. For example, traders may expect price movement in a stock if significant news is released about a company after the market closes. They may want to cash out stocks, and do so using a market-on-open order.
The News Cycle
Good news, such as a company exceeding their earnings expectations, may lead to an increase in the price of that stock. Bad news, such as missing earnings estimates, may lead to a decline in the stock price. Some traders and investors may also watch the after-hours market and decide to place an MOO order in response to what they see.
It’s also important to know that stock exchanges tend to experience the most volume or trades at the open and right before the close. Even though the stock market is open from 9:30am to 4:00pm, many investors concentrate their trading at the beginning and near the end of the trading day in order to take advantage of all the liquidity, or ease of trading.
Examples of MOO Trade
Let’s look at some hypothetical examples of why an MOO order might be useful:
Example 1
Say that news breaks late in the evening regarding a large scandal within a company. The company’s stock has been trading lower in the after-hours market. An investor could look at this scenario and believe that the stock is going to continue to fall throughout the next trading day and into the foreseeable future. They enter an MOO order to sell their holding as soon as the market is open for trading.
Example 2
Or maybe a company quarterly earnings at 7am on a trading day. The report is positive and the investor believes the stock will rise rapidly once the market opens. With an MOO order, the investor can buy shares at whatever the price may be at the open.
Example 3
Though this won’t apply to the average individual investor, MOO orders may also be used by the brokerage firms to fix errors from the previous trading day. A MOO order may be used to rectify the error as early as possible on the following day.
Risks of Market-on-Open Orders
It is important to understand that if a MOO order is entered, the investor receives the opening price of the stock, which may be different from the price at the previous close.
Volatility at the Open
Considering the unpredictable and inherent volatility of the stock market, the price could be a little bit different — or it could be very different. Investors that use MOO orders to try and time the market may be sorely disappointed in their own ability to do so, but only because timing the market is exceedingly difficult.
Most investors will likely want to avoid trying to weave in and out of the market in the short-term and stick with a long-term plan. Some investors may use MOO orders with the intention of taking advantage of price swings, but the variability of the market could trip up a new investor.
Because the order could be filled at a price that is significantly different than anticipated, this may create the problem of not having enough cash available to cover a trade.
Using Limit-on-Open Orders
An alternative option is to use a limit-on-open order, which is like an MOO order, but it will only be filled at a predetermined price. Limit-on-market orders ensure that a transaction only goes through at a certain price point or “better.” As discussed, there are other types of limit orders out there, too, for given situations. For instance, there may be a context in which it’s best to use a stop loss order, rather than a limit-on-open or similar type of order.
The downside of doing a limit-on-market order is that there is a chance that the order doesn’t get filled.
Liquidity Issues
With an MOO order, there could also be a problem of limited liquidity. Liquidity describes the degree to which a security, like a stock or an ETF, can be quickly bought or sold.
As mentioned, there tends to be greater liquidity at the beginning of the day and at the end, and investors will generally not have a problem trading the stocks of large companies, because they have many active investors and are very liquid.
But smaller companies can be less liquid assets, making them slightly trickier to trade. In the event that there is not enough liquidity for a trade, the order may not be filled, or may be filled at a price that is very different than anticipated.
💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.
Creating a Market-on-Open Order
Creating a market-on-open order is fairly simple, but may vary from trading platform to trading platform. Generally speaking, though, a trader or investor would select an option to execute a MOO when filling out the details of a trade they wish to make.
For instance, if you wanted to sell 5 shares of Company A, you’d dictate the quantity of stock you’re trying to sell, and then choose an order type — at this point, you’d select a market-on-open order from what is likely a list of choices. Again, the specifics will depend on the individual platform you’re using, but this is generally how a MOO is created.
The Takeaway
Market-on-open orders are submitted by investors when they want their order executed at the opening price and be part of the morning auction. An investor may use this order if they want to capture a stock’s price move up or down as soon as the trading day starts.
However, MOO orders don’t guarantee any price levels, so it may be risky for an investor if shares don’t move in the direction they were expecting. Unlike limit orders though, they are more likely to get executed.
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FAQ
What is a market-on-open order?
Market-on-open (MOO) orders are stock trading orders made outside of normal market hours and fulfilled when the markets open. Trades execute as soon as the market opens.
What is a market-on-open limit on open?
A limit-on-open order, or LOO, is a specific form of limit order that executes a trade to either buy or sell securities when the market opens, given certain conditions are met. Usually, those conditions concern a security’s value.
What is the difference between market-on-close and market-on-open?
As the name implies, market-on-close orders are executed when the market closes at 4 pm ET, Monday through Friday (excluding holidays). Conversely, market-on-open orders are executed when the market opens at 9:30am ET, Monday through Friday.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
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Magic Formula investing is a rules-based investing strategy developed by hedge fund manager and professor Joel Greenblatt. First outlined in his book, The Little Book That Beats the Market, the magic formula investing strategy takes a simplified approach to choosing investments.
Magic Formula Investing draws on principles of value investing to create portfolios that seek to outperform the market. For interested investors, knowing the ins and outs of the strategy before applying it is important.
Key Points
• Magic Formula Investing is a strategy developed by Joel Greenblatt, focusing on good companies at attractive prices.
• Stocks are screened using earnings yield and return on capital as primary criteria.
• The strategy notes that selecting 20 to 30 top-ranked companies, may help build a diversified portfolio.
• Magic Formula suggests a holding period for stocks is 12 months to help increase potential after-tax returns.
• Limitations include exclusion of foreign, financial, and utility companies, with no guaranteed positive returns.
What Is Magic Formula Investing?
At its core, Greenblatt’s Magic Formula Investing strategy focuses on finding good companies to invest in that are trading at attractive prices. Specifically, this strategy focuses on two things: Stock price, and the cost of capital.
The Magic Formula provides a way to help investors find or pinpoint companies that they deem undervalued by the market, and that may potentially offer a high return on their invested capital. It shares some similarities with value investing, which emphasizes finding the “hidden gems” that trade below their intrinsic value.
Value investors often follow a buy-and-hold strategy, in which securities are purchased with the intent to hold them long-term. The idea is that even though the market may have undervalued a company, it could grow in value over time and result in higher returns once an investor decides to sell.
This strategy utilizes fundamental analysis, which involves looking at things like revenue and earnings, and calculating return on equity to measure a company’s financial health.
The difference between a buy and hold strategy and Magic Formula Investing is that fundamental analysis doesn’t come into play. Instead, the formula relies on Greenblatt’s stock-screening method to identify the most promising stocks to invest in.
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, an investment platform you choose should offer the features that you need to manage your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
What Is the Magic Investing Formula?
Screening stocks using the Magic Formula method is based on a rankings system. As developed by Greenblatt, this system uses three distinct criteria to rank companies:
This is one way to measure a company’s profitability. This figure represents the net income of a company before income tax expense and interest expenses are deducted. To calculate a company’s EBIT, you’d subtract income tax expense and interest expenses from its revenue.
Earnings Per Share (EPS)
EPS is another measure of profitability, though it’s calculated differently than EBIT. With EPS, you divide a company’s net profit by the total number of common shares of stock it has outstanding. This is also a way to measure a company’s value, since EPS can tell you roughly how much money it makes per share of stock. A higher EPS may suggest higher value and a willingness for investors to pay more for shares of a company’s stock.
Return on Capital
Return on capital measures how well a company is able to allocate its capital to investments that are profitable. To figure out this number, you’d subtract dividends from net income, then divide that by the sum total of the company’s debt and equity.
By applying EBIT, EPS, and return on capital, the Magic Formula method is intended to determine quality companies at an attractive price.
How Magic Formula Investing Works
For investors interested in using the Magic Formula to help build a portfolio, there’s a specific sequence of steps to follow that Greenblatt outlines.
1. Set a Market Capitalization Threshold
Market capitalization (commonly known as market cap) represents the current number of shares of stock a company has outstanding multiplied by the price per share. Companies can be categorized as small-cap, mid-cap or large-cap, based on their market capitalization.
Engaging in Magic Formula Investing, an investor will typically start by excluding any companies with a market capitalization below $100 million. But one could set this number higher or lower, depending on personal preferences. Greenblatt advocates setting the threshold at $1 billion (which means large-cap) to help minimize volatility.
2. Exclude Certain Securities
In Magic Formula Investing, an investor next should eliminate several categories of investments. Those include stocks in the financials and utilities sectors, as well as foreign companies and American Depositary Receipts (ADRs). An ADR offers a way to indirectly own foreign companies that aren’t traded on U.S. stock exchanges.
3. Make the Necessary Calculations
Once an investor has narrowed down their list of companies, they can start running the numbers. Specifically, this means calculating:
• Earnings before interest and taxes (EBIT)
• Earnings yield (EBIT divided by enterprise value, which is a company’s total value as measured by its market capitalization plus total debt minus its cash assets)
• Return on capital (EBIT divided by the sum total of net fixed assets and working capital)
4. Create Your Rankings
After doing the above math, an investor can move on to ranking companies according to the Magic Formula — from highest earnings yield and highest return on capital to lowest. From this point on, one would focus on the top 20 to 30 companies when choosing how to invest.
5. Start Building Your Portfolio
Greenblatt suggests buying the stocks that rank in that top 20-30 list on a rolling basis. For instance, an investor may consider buying two to three positions per month for one year, eventually owning 24 to 36 of the top ranking companies. According to Greenblatt’s formula, owning at least 20 different companies will help to maintain diversification.
At the end of the 12-month period, the Magic Formula dictates that investors would sell off the losing stocks and the winners, being mindful of capital gains taxes rules. Then they’d start the cycle over again, using the Magic Formula rules to select a new crop of stocks to invest in.
Holding stocks for a year before selling at a gain or loss is intended to help maximize potential after-tax returns. When you sell stocks at a profit that you’ve held longer than one year you’d be subject to the more favorable long-term capital gains tax rate.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
Magic Formula Investing Results
Any time one is considering an investment strategy, it’s important to understand how it works and how it aligns with your goals and risk tolerance. Greenblatt’s approach is intended to help investors choose companies whose performance can potentially beat the market. Magic Formula is considered to be a tool for long-term investors seeking a disciplined, value-oriented strategy and has historically demonstrated strong outperformance of markets such as the S&P 500.
There’s no guarantee, however, that investors will see a positive return utilizing the strategy for any given year and, as with any investing strategy, there is also the risk of seeing losses.
Whether investors can replicate those Magic Formula Investing results for themselves can depend on different variables. For example, an individual portfolio may produce a very different return profile if an investor adjusts the market capitalization threshold up or down. Or if a company has an above-average year for revenue and profits, that could affect how the ranking calculations shake out.
Pros and Cons of Magic Formula Investing
The main idea behind the Magic Formula method is that it may be an option for even beginner investors to use. The idea is that by following the formula, an investor can eliminate some of the noise when making investment decisions.
That includes not giving in to investment biases that could prompt an investor to buy or sell at the wrong time. By focusing on the rankings and sticking with a one-year rolling schedule of buying and then selling, an investor can potentially remove their emotions from the equation. This can help avoid selling off stocks in a panic if the market becomes more volatile.
Downsides of Magic Formula Investing
While this formula can help an investor create a diversified portfolio, it’s still exclusionary in that it doesn’t include investing in foreign companies or companies in the financials and utilities sectors.
Beyond that, there’s no certainty that an investor will see positive results in the form of above-average returns — as noted. Greenblatt himself says that there’s nothing “magical” about the formula and that it shouldn’t be considered a guarantee of investment returns or performance. As with any investing strategy, it isn’t foolproof.
Finally, the Magic Formula Investing strategy is meant to be a long-term one. For investors more interested in seeing quick results versus adopting a buy and hold mindset, day trading might be an option to consider, though it is higher-risk.
The Takeaway
Hedge fund manager and professor Joel Greenblatt devised his Magic Formula Investing strategy as a way to invest in a curated group of good companies with high potential for returns. The system ranks companies according to three criteria: earnings before interest and taxes (EBIT), earnings per share, and return on capital. The system is intended for anyone from first-time investors to more seasoned investors.
But as with any investment strategy, there is no guarantee that the magic formula investing results will be positive every time. There is a potential for both gains and losses.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
What is the Magic Formula Investing strategy’s formula?
Magic Formula Investing is a strategy to choose specific stocks, and it utilizes a ranking system, developed by Joel Greenblatt, that uses three distinct criteria to rank companies: Earnings before interest and taxes (EBIT), earnings per share, and return on capital.
What returns does the Magic Formula Investing method supply?
The Magic Formula was designed to help investors outperform the market over a long period of time. But depending on the specifics of an investor’s portfolio, returns can vary wildly, and it’s possible the strategy could lead to losses as well.
What is the “magic” in Magic Formula Investing?
Magic Formula Investing is a stock-screening method used to identify companies that might be undervalued. Unfortunately, there is no magic in the formula or strategy, and there’s no guarantee that it will yield returns for investors.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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Limit orders are a type of market order that gives investors the opportunity to trade stocks or other securities at a specified price. Doing so allows traders or investors to garner some form of price protection — it allows them to sell only at a price at which they won’t take a loss, or purchase securities at a price they’re comfortable with.
Limit orders can be used as a part of a broader investment or trading strategy, but can be fairly advanced for some investors.
Key Points
• Limit orders allow investors to buy or sell securities at a specific price or better, ensuring price protection.
• Buy limit orders set a maximum price; sell limit orders set a minimum price.
• Advantages of limit orders include price protection, convenience, and reduced risk of emotional trading.
• Disadvantages involve the risk of non-execution and missing out on better prices.
• Stop-limit orders combine stop and limit features, offering additional control over trade execution.
Limit Order Defined
As noted, a limit order allows investors to buy or sell securities at a price they specify or better, providing some price protection on trades.
When you set a buy limit order, for example, the trade will only be executed at that price or lower. For sell limit orders, the order will be executed at the price you set or higher. By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.
How Do Limit Orders Work?
In the simplest terms, limit orders work as a sort of restriction that an investor can choose (to either buy or sell) with “limits” on a minimum or maximum price. An investor places an order to buy a stock at a minimum price, for instance, or places an order to sell at a maximum price, in an effort to seek returns, while limiting losses.
There are two types of limit orders investors can execute: buy limit orders and limit sell orders. An important thing to know is that while a limit order specifies a desired price, it doesn’t guarantee the trade will occur at that price — or at all.
When you set a limit order, the trade will only be executed if and when the security meets the terms of the order — which may or may not happen, depending on the overall market conditions. So, when an investor sets a limit order, it’s possible to miss out on other investing opportunities.
Types of Limit Orders
As mentioned, there are two types of limit orders investors can execute: buy limit orders and limit sell orders. But there’s another, a sort of combination of the two, to be aware of.
1. Buy Limit Order
For buy limit orders, you’re essentially setting a ceiling for the trade — i.e., the highest price you’d be willing to pay for each share. If a trader places a buy limit order, the intention is to buy shares of stock. The order will be triggered when the stock hits the limit price or lower.
For example, you may want to buy shares of XYZ stock at $15 each. You could place a buy limit order that would allow the trade to be carried out automatically if the stock reaches that purchase price or better.
2. Sell Limit Order
For sell limit orders, you’re setting a price floor — i.e., the lowest amount you’d be willing to accept per share. If a trader places a limit order to sell, the order will be triggered when the stock hits the limit price or higher. So you could set a sell limit order to sell XYZ stock once its share price hits $20 or higher.
3. Stop-Limit Order
A stop-limit order is a combination of a stop order and a limit order. Stop-limit orders involve setting two prices. For example: A stock is currently priced at $30 and a trader believes it’s going to go up in value, so they set a buy stop order of $33.
When the stock hits $33, a market order to buy will be triggered. But with a stop-limit order, the trader can also set a limit price, meaning the highest price they’re willing to pay per share — say, $35 per share. Using a stop-limit order gives traders an additional level of control when they’re executing a strategy.
Stop-limit orders can also help traders make sure they sell stocks before they go down significantly in value. Let’s say a trader purchased stock XYZ at $40 per share, and now anticipates the price will drop. The trader doesn’t want to lose more than $5 per share, so they set a stop order for $35.
If the stock hits $35 — the stop price — the stock will be triggered to sell. However, the price could continue to drop before the trade is fully executed. To prevent selling at a much lower price than $35, the trader can set a limit order to only sell between $32 and $35.
How to Set a Limit Order
When placing a limit order with your brokerage firm, the broker or trading platform might ask for the following information:
• The stock or security
• Is it a buy or sell order
• Number of shares to buy or sell
• Stock order type (limit order, market order, or another type of order)
• Price
When setting up a limit order, the trader can set it to remain open indefinitely, (until the stock reaches the limit price), or they can set an expiration date.
Limit Order Example
Here’s an example of how a limit order might work: Say a trader would like to purchase 100 shares of stock XYZ. The highest price they want to pay per share is $26.75. They would set up a limit buy order like this:
Buy 100 shares XYZ limit 26.75.
As noted above, the main upside of using limit orders is that traders get to name a desired price; they generally end up paying a price they expect; and they can set an order to execute a trade that can be executed even if they are doing other things.
In this way, setting limit orders can help traders seize opportunities they might otherwise miss because limit orders can stay open for months or in some cases indefinitely (the industry term is “good ‘til canceled,’ or GTC). The limit order will still execute the trade once the terms are met.
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When a Trader Might Use a Limit Order
There are several reasons why a trader or investor might want to use a limit order.
• Price protection. When a stock is experiencing volatility, you may not want to risk placing a market order and getting a bad price. Although it’s unlikely that the price will change drastically within a few seconds or minutes after placing an order, it can happen, and setting a limit order can set a floor or a ceiling for the price you want.
• Convenience. Another occasion to use a limit order might be when you’re interested in buying or selling a stock, but you don’t want to keep a constant eye on the price. By setting a limit order, you can walk away and wait for it to be executed. This might also be a good choice for longer-term positions, since in some cases traders can place a limit order with no expiration date.
• Volatility. Third, an investor may choose to set a limit order if they are buying or selling at the end of the market day or after the stock market has closed. Company or world news could be announced while the market is closed, which could affect the stock’s price when the market reopens. If the investor isn’t able to cancel a market order while the market is still closed, they may not be happy with the results of the trade. A limit order can help prevent that.
Limit orders can also be useful when the stock being traded doesn’t have a lot of liquidity. If there aren’t many people trading the stock, one order could affect the price. When entering a market order, that trade could cause the price to go up or down significantly, and a trader could end up with a different price than intended.
Pros and Cons of Using Limit Orders
Each type of order has pros and cons depending on the particular situation.
Pros of Limit Orders
Some advantages of limit orders include naming your price, and taking a set-it-and-forget-it approach.
• The trader gets to name their price. One of the chief reasons traders rely on limit orders is to set baselines for profits and losses. They won’t end up paying a price they didn’t expect when they buy or get a price below their target when it’s time to sell.
• The trader can set the order and walk away. Day trading can be time-consuming, and it requires a significant amount of knowledge. Investors who use limit orders don’t have to continuously watch the market to get the price they want.
• Insulate against volatility. Volatility can cause you to make emotional decisions. Limit orders can give traders more control over their portfolio and ward off panic-buying or selling.
• Ride the gaps. Stock prices can fluctuate overnight due to after-hours trading. It’s possible to benefit from price differences from one day to another when using limit orders.
For example, if a trader places a buy limit order for a stock at $3.50, but the order doesn’t get triggered while the market is open, the price could change overnight. If the market opens at $3.30 the next morning, they’ll get a better price, since the buy limit order gets triggered if the stock is at or below the specified price.
Cons of Limit Orders
Conversely, limit orders can have some disadvantages.
• The order may never be executed. There may not be enough supply or demand to fulfill the order even if it reaches the limit price, since there could be hundreds or even thousands of other traders wanting to buy or sell at the specified price.
• The stock may never reach the limit price. For example, if a stock is currently priced at $20, a trader might set a limit order to buy at $15. If the stock goes down to $16 and then back up to $20, the order won’t execute. In this case, they would miss out on potential gains.
• The market can change significantly. If a trader sets a shorter-term limit order, they might miss out on a better price. For example, if a stock a trader owns is currently priced at $150, the trader may choose to set a sell limit order at $154 within four weeks. If the company then makes a big announcement about a new product after that period, and the stock’s price spikes to $170, the trader would miss out on selling at that higher price.
• It takes experience to understand the market and set limit orders. New investors can miss out on opportunities and experience unwanted losses, as with any type of investment.
Limit Order vs Market Order
Limit orders differ from market orders, which are, essentially, orders to buy a security immediately at its given price. These are the most common types of orders. So, while a market order is executed immediately regardless of terms, limit orders only execute under certain circumstances.
Limit orders can also be set for pre-market and after-hours trading sessions. Market orders, by contrast, are limited to standard trading hours (9:30am to 4pm ET).
Remember: Even though limit orders are geared to a specific price, that price isn’t guaranteed. First, limit orders are generally executed on a first-come-first-served basis. So there may be orders ahead of yours that eliminate the availability of shares at your limit price.
And it bears repeating: There is also the potential for missed opportunities: The limit order you set could trigger a trade. But then the stock or other security might hit an even better price.
In other words, time is a factor. In today’s market, computer algorithms execute the majority of stock market trades. In this high-tech trading environment, it can be hard as an individual trader to know when to buy and sell. By using certain types of orders, like limit orders, traders can potentially limit their losses, lock in gains, and avoid swings in the market.
Though limit orders are commonly used as a part of day trading strategies, they can be useful for any investor who wants some price protection around their trades. For example, if you think a stock is currently undervalued, you could purchase it at the current market price, then set a sell limit order to automatically sell it when the price goes up. Again, the limit order can stay open until the security meets your desired price — or you cancel the order.
If you’re trying to parse out when a market order or a limit order is the best tool to use, consider the following.
A trader might want to use a market order if:
• Executing the trade immediately is a priority
• The stock is highly liquid
• They’re only trading a small number of shares
• The stock has a narrow bid-ask spread (about a penny)
A trader might want to use a limit order if:
• They want to specify their price
• They are trading an illiquid stock
• They want to set a long-term trade (or even walk away for their lunch break and still have the trade execute)
• They feel a stock is currently over- or undervalued
• The stock has a large bid-ask spread
• They are trading a larger number of shares
Limit Orders vs Stop Orders
There is another type of order that can come into play when you’re trying to control the price of a trade: a stop order. A stop order is similar to a limit order in that you set your desired price for a stock, say, and once the stock hits that price or goes past it, a market order is triggered to execute the purchase or sale.
The terms of a limit order are different in that a trade will be executed if the stock hits the specified price or better. So if you want to sell XYZ stock for $50 a share, a sell limit order will be triggered once the stock hits $50 or higher.
A stop order triggers a market order once XYZ stock hits $50, period. By the time the order is executed, the actual stock price could be higher or lower.
Thus with a stop order there’s also no guarantee that you’ll get the specified price. A market order is submitted once the stop price is hit, but in fast-moving markets, the actual price you pay might end up being higher or lower.
Stop orders are generally used to exit a position and to minimize losses, whereas limit orders are used to capture gains. But two can also be used in conjunction with each other with something called a stop-limit order.
What Happens If a Limit Order Is Not Filled?
A limit order can only be filled if the stock’s price reaches the limit price or better. If this doesn’t happen, then the order is not executed, and it expires according to the terms of the contract. An order can be good just for a single trading day, for a certain period of time, or in some cases it’s possible to leave the limit order open-ended using a GTC (good ‘til canceled) provision.
So if you placed a buy limit order, but the stock does not reach the specified price or lower, the purchase would not be completed and the order would expire within the specified time frame.
And if you’re using a sell limit order, but the security never reaches the specified sell price or higher, the shares would remain in your trading account and the order would expire.
Limit Orders and Price Gaps
Price gaps can occur when stocks close at one price then open at a different price on the next trading day. This can be attributed to after-market or pre-market trading that occurs after the regular market hours have ended. After-hours trading can impact stock price minimally or more substantially, depending on what’s spurring trades.
For example, say news of a large tech company’s planned merger with another tech giant leaks after hours. That could send the aftermarket trading markets into a frenzy, resulting in a radically different price for both companies’ stocks when the market reopens. Pricing gaps don’t necessarily have to be wide, but large pricing swings are possible with overnight trading.
Limit orders can help to downplay the potential for losses associated with pricing gaps. Placing a buy limit order or limit sell order may not close the gap entirely. But it may help to mitigate the losses you may experience when gaps in pricing exist. Whether the gap is moving up or down can determine what type of limit order to place and where to cap your limit price.
Advanced Strategies for Using Limit Orders
Seasoned investors may utilize more advanced strategies with limit orders. But note that it takes some practice and a solid understanding of what you’re doing to ensure you’re not taking undue risk.
Combining Limit Orders With Technical Analysis
Utilizing technical analysis strategies — which involve analyzing chart movements to try and get a sense of what a stock might do next — is one advanced strategy that investors can utilize. It’s fairly advanced, and requires some homework and analysis skills, but paired with limit orders, it may be a way for investors to incorporate new methods into their overall strategy.
Again, though: This is advanced, and doesn’t guarantee results.
Setting Conditional Limit Orders
Investors may also want to look at the possibility of using conditional limit orders to fine-tune their strategy. Conditional limit orders allow investors to set order “triggers” based on price movements, and there are several types: Contingent, one-triggers-the other, one-cancels-the-other, and one-triggers-a-one-cancels-the-other. So, they all sort of relate and can rely on each other.
The Takeaway
Limit orders can be an effective and efficient way for investors to set price caps on their trades, and also give them some protection against market swings. Limit orders offer other advantages as well, including giving traders the ability to place longer- or shorter-term trades that will be executed even if they’re not continuously watching the market. This can potentially protect investors against losses and potentially lock in gains.
That said, limit orders are complicated because they don’t guarantee that the trade will be executed at the set price. The stock (or other security) could hit the limit price — and there might not be enough supply or demand to complete the trade. There is also the potential for some missed opportunities, if the price you set triggers a trade, and subsequently the stock or other security hits an even better price.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
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FAQ
Can I specify the price for a limit order?
Yes, investors can specify the price for a limit order. In fact, the price typically is the limit in a limit order, representing either a price ceiling or a price floor.
How long does a limit order stay active?
Generally, a limit order will stay active indefinitely, unless an investor cancels it or specifies otherwise. That means that if the limit is never reached, the order will not execute, and the limit order will remain active until the limit is reached.
Can I cancel a limit order once it’s placed?
Investors can cancel standing limit orders as long as conditions haven’t arrived that have led to the order being actively executed. The cancellation process will depend on the specific exchange an investor is using, however.
What happens if the market price doesn’t reach my limit price?
If the market price of a stock does not reach the limit price — either a price floor or price ceiling — then the limit order will not execute, and the limit order will remain active until it does.
Can I place a limit order outside of regular trading hours?
It’s possible to place limit orders outside of regular trading hours, depending on the rules of a given exchange, and what market conditions dictate. The order itself, of course, won’t execute until the market opens, assuming that the limit is reached.
Are there any fees associated with limit orders?
There may or may not be fees associated with limit orders, and it’ll depend on the specific exchange or brokerage an investor is using. Note that some brokerages may charge higher fees for limit orders than market orders — but some may charge no fees at all.
Are limit orders guaranteed to be executed?
No, there is no guarantee that a limit order will be executed, as it will only execute if the limit price is reached. If the limit is not reached, the order will remain active but not execute.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
College students who took out federal student loans and graduate, withdraw, or drop below half-time enrollment must complete student loan exit counseling. Student loan exit counseling, or FAFSA exit counseling, helps students better understand their federal student loans and what their options for repayment are.
Key Points
• Exit counseling is a mandatory requirement for federal student loan borrowers.
• It provides a comprehensive overview of student loan details, interest rates, and repayment plans.
• Exit counseling explains consequences of default and options for deferment and forbearance.
• Basic financial planning and budgeting tips are included to help manage loan repayments.
• Private student loans are not covered in this counseling process.
What to Expect With Student Loan Exit Counseling
Depending on your school, students typically complete their exit counseling online or through an in-person meeting with a counselor at the school’s financial aid office. Schools may also offer online counseling programs to review all of the important information regarding paying back student loans. Each student should check their school’s website to find out what their options are.
How Long Does Exit Counseling Take?
Generally, student loan exit counseling takes about 20 to 30 minutes if completed online. If the student meets with a counselor or has specific questions, it might take longer. Although a presentation about financial planning might not sound all that exciting, it’s a great idea to take advantage of the learning and soak up as much knowledge as possible.
Before student loan exit counseling, the student must prepare some information. First, they should know the outstanding balances on their current federal student loans. This can be found on the Federal Student Aid website.
The student should gather the names, addresses, email addresses, and phone numbers for a close relative, two references that live in the United States, and their employer, if they have one. The Department of Education requires this information in the event that a borrower defaults on their loans and cannot be contacted.
During the student loan exit counseling, the student will also spend some time mapping out their potential salary and living expenses, such as rent and utilities, so that they can create an expected budget.
Topics you’ll encounter in student loan exit counseling include understanding your loans, plans and options to repay, how to avoid default, prioritizing financial planning, and choosing a repayment plan.
Understanding Your Loans
During the first portion of student loan exit counseling, the student receives a summary of their federal student loans, including total balance, terms and conditions, and the date that the first payment is due.
Next, counseling will cover the interest rates on student loans. Each loan has a set interest rate that depends on the loan type (subsidized, unsubsidized, PLUS, etc.) and the year dispersed. Students may want to write these interest rates down so that they can calculate their monthly payments in a later section.
Plans to Repay
Next, student borrowers will learn all about the rules of student loan repayment. They typically have control over the repayment plan that they choose, so it is wise to understand the pros and cons of all options.
For example, income-driven repayment plans may lower the borrower’s monthly bill (in accordance with their income), but could cost them more in interest over time. Keep an eye out for the differences between plans.
Borrowers are provided with a number of helpful student loan repayment calculations. Most students going through student loan exit counseling will see calculations that show how expensive it can be to utilize a grace period. Interest still accrues during a grace period and as it accrues, it is capitalized, which means it is added to the balance of the loan. Yet another calculator shows the borrower how much can be saved by making additional payments.
Student borrowers are also provided with logistical repayment information, such as in what scenarios you should contact your loan service provider.
Avoiding Default
Not paying loans on time so that they fall into delinquency could have consequences in many areas of a borrower’s life. Therefore, during student loan exit counseling, there is a large focus on borrowers avoiding default on their student loans.
This section will discuss the consequences for both a borrower’s federal loans (such as loss of student loan deferment options) and for career and future income (such as wage garnishment and impact to credit scores).
It will also cover options in the event that a borrower cannot make payments, such as deferment and forbearance, and the pros and cons of each of these options.
This section will also explain federal loan consolidation, student loan forgiveness programs, loan discharge for the permanently disabled, and how to settle student loan disputes.
Prioritizing Financial Planning
The borrower’s program should discuss budgeting, credit management, and other basics of money management. Borrowers are encouraged to consider their short-term and long-term financial goals.
Repayment Information
Last, a borrower chooses a repayment plan, enters in their new contact information, employer or future employer’s information, and provides the names and contact information of references. The borrower’s loan servicer then reviews the information and provides the borrower with a repayment plan.
According to Federal Student Aid, the borrower is told to list their preferred repayment options, at which point their loan service will make a final decision and assign the borrower a repayment plan.
What Your Exit Counselor Doesn’t Tell You
Student loan exit counseling is necessary, important, and required of all students with federal student loans. But overall, the program is pretty light and quick.
Think about it: Some borrowers could have tens of thousands or even hundreds of thousands of dollars to pay back and get just 20 minutes of guidance as they click through some online slides. This information very easily could be part of a full, multi-credit course at a university.
Also, there is some important information that a borrower just won’t receive in exit counseling, and that’s information on how to handle their private student loans. While there are some similarities, private student loans will have many of their own nuances that are imperative to understand.
For example, private loans determine their own repayment plans and generally don’t offer deferment or forbearance options, and they may or may not allow for advance prepayment on a loan.
Student Loan Refinancing
Federal student loan exit counselors and programs generally do not cover student loan refinancing. Refinancing is the process of paying off student loans—both federal and private—with a new loan, ideally at a lower rate of interest.
Refinancing could potentially help lower a borrower’s interest rate and combine multiple loan payments into one.This is different from federal loan consolidation, a program offered through the government that takes a weighted average of the existing loans’ interest rates. The main purpose of a federal loan consolidation is to simplify monthly payments; whereas a refinance through a private lender ideally lowers your interest rate.
With refinancing, the lender pays off your government loans with a private loan. It’s important to note that refinanced loans are not eligible for federal repayment programs such as income-driven repayment, deferment, and public service loan forgiveness.
For borrowers who have no plans to use these programs, it may be worth considering refinancing. You may qualify for a better interest rate through refinancing if your credit score or financial situation has improved since you initially took out your loans as a student.
Regardless, it is a great idea to go into student loans exit counseling with a clear head. Paying back your loans is no small feat, so it will be so worth it to do some hard work up-front to make the rest of the process as smooth as possible.
If you do decide to refinance your student loans now or down the line, consider SoFi. SoFi offers flexible terms and no origination or prepayment fees.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQ
What happens if you don’t complete exit counseling?
Exit counseling for federal student loans is required. Failure to complete exit counseling could result in your school withholding your diploma or official transcript. This could affect your ability to apply for a job that requires a transcript or diploma or apply to graduate school.
What is an exit interview for student loans?
Student loan exit counseling helps students understand their federal student loans, repayment options, and interest rates. It also provides students with tips for avoiding delinquency and default on their loans. At the end of exit counseling, students choose a repayment option.
What happens if you never pay off your student loans?
The consequences for failing to repay student loans can be severe. After 270 days of missed payments, federal student loans go into default. At that point, the entire unpaid balance of your loan and any interest owed is due immediately. Your wages may be garnished and your tax refunds withheld. The default is reported to the credit bureaus and damages your credit rating, which could take years to rebuild and impact your ability to buy a house or a car. And finally, your lender or loan servicer can take you to court.
SoFi Student Loan Refinance Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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