Trading opportunities can come and go in an instant in today’s fast-paced stock market. Fortunately, it isn’t necessary to be a full-time day trader to maximize on price fluctuations or grow a portfolio.
Stock exchanges allow traders to set up different types of orders depending on the given situation, goals, and trading specifications. The main types of orders are market orders and limit orders. If a trader places a market order, they pay whatever the current market price is for the stock they’re buying or selling.
By using limit orders, traders can name their own buy and sell prices. When they place a limit order, traders input the price they’re willing to purchase or sell a stock for. The order only gets triggered if and when the stock reaches the limit price.
This differs from a market order, which requires buying or selling a stock for whatever the current market price is. Market orders go through more quickly and have more of a guarantee of being executed than limit orders, but they don’t give any control over price.
The main upsides of using limit orders are that traders get to name their price, they won’t end up paying a price they didn’t expect, and they can set up an order and walk away.
This can offer more control and flexibility than using market orders. However, there are some downsides to using limit orders. There’s no guarantee that a limit order will get fulfilled, so a trader can miss out on an opportunity.
The market can also change a lot in a short amount of time, so if a trader isn’t paying attention, they could see unwanted losses from a limit order. Even if a trader doesn’t watch the markets all day every day, it’s still a good idea to keep an eye on open orders in case they want to make any adjustments or cancellations.
Limit orders can work well in a number of different trading situations. If the stock being traded is highly volatile, a limit order can help traders retain control and avoid paying an unexpected price.
Setting limit orders can also help traders seize opportunities they might otherwise miss. Limit orders can stay open for months or even indefinitely, so traders can set them and walk away rather than keeping their eyes glued to the market.
Traders who wish to speculate on the market can also use limit orders. For example, if a trader thinks a stock is currently undervalued, they could purchase it at the current market price, then set a limit order to automatically sell it when the price goes up.
However, speculating on the market is risky and requires experience. A trader just getting started with building a stock portfolio may not be ready to start setting limit orders.
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In today’s market, computer algorithms execute more than half of all stock market trades each day. It can be challenging to keep up in this fast paced environment and know when to buy stocks as an individual trader. By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.
When a trader decides to buy or sell a stock, there are two ways they can place an order. If they place a market order, they’ll buy or sell the stock for whatever the current market price is. When they place a limit order, they set their buy or sell price, and if the stock hits that price the order will usually be executed potentially within a quarter in or a quarter out of the specified limit order price.
Depending on the individual’s goals and the particular trading situation, each type of order will have its pros and cons. Here’s what traders might want to consider when deciding whether to place a limit order or another type of order.
What Is a Limit Order?
A limit order is a type of stock or security order that lets the trader choose the price they wish to buy or sell a stock for. The order will only be triggered if the stock’s market price is at the price the trader sets.
However, if the stock never reaches the price set when the limit order was placed, the order will not go through. In this case, the investor may miss out on a trading opportunity.
By choosing to use a limit order, investors are geared to a specific price, but their order isn’t guaranteed to be fulfilled.
Conversely, if a trader uses a market order, it is likely to be fulfilled quickly, but without control over the price.
Types of Limit Orders
The two types of limit orders are buy limit orders and sell limit orders.
If a trader places a buy limit order, the order will be triggered when the stock hits the limit price or lower. If they place a sell limit order, the order will be triggered when the stock hits the limit price or higher.
Limit Orders vs. Stop Orders
Similar to a limit order, a stop order, or stop-loss order, triggers at the stop price or worse. Stop orders are used to minimize losses, whereas limit orders are used to capture gains. The two can also be used in conjunction.
If a trader places a sell stop order, the order will go through if the stock hits the stop price or lower. If they place a buy stop order, the order will go through if the stock hits the stop price or higher.
For example, if a stock that a trader is interested in is currently priced at $20, but they think that’s overpriced, they could set a limit order to purchase the stock if it hits $15 or less.
However, if a trader is concerned about the stock’s price continuing to decline, they could set a stop order to sell the stock if it reaches $12 or lower, thereby minimizing their losses.
A stop-limit order is a combination of a stop order and a limit order. Stop-limit orders involve two prices. An example of a buy stop-limit order would go like this: A stock is currently priced at $30 and a trader believes it’s going to go up in value, so they set a stop price of $33.
When the stock hits $33, the order will be triggered to be fulfilled. With a stop-limit order, the trader can also set a limit price, meaning the highest price they’re willing to pay per share.
If they set a limit price of $35, and their order can be fulfilled before the stock reaches that price, their order goes through. If there aren’t enough sellers in that price range, the order won’t go through. Using a stop-limit order gives traders an additional level of control.
Stop limit orders can also help traders make sure they sell stock investments before the stocks significantly go down in value. Let’s say a trader purchased stock XYZ at $40 per share. The trader doesn’t want to lose more than $5 per share, so they set a stop limit order for $35.
If the stock goes hits $35, the stock will be triggered to sell. However, the trader doesn’t want to sell for a very low price, so they set the stop limit order to only sell between $32 and $35. If the stock drops below $32 and the trader still has more shares, they won’t be sold.
When a Trader Might Use a Limit Order
The advantage of using limit orders is that traders get to name their price. Traders who don’t want to miss out on opportunities can also benefit from using limit orders.
When a stock is going up or down very fast, an investor 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 the few seconds or minutes after placing an order, it can happen.
Traders who want to speculate about stock values can also set limit orders. For instance, if an investor thinks a stock is currently undervalued, they could purchase it at the current market price, then set a limit order to sell it when it goes up.
However, speculating about the stock market and trying to time its fluctuations is very challenging. Before entering into speculative trades, it’s important to do research about the company and the stock and know the risks.
Another occasion to use a limit order might be when an investor is interested in buying or selling a stock but doesn’t want to keep a constant eye on the price.
By setting the price using a limit order, they can walk away and wait for it to be fulfilled. This might also be a good choice for longer-term trades, since traders can place a limit order with no expiration date.
Thirdly, 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.
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.
A trader might want to use a market order if:
• Quick order fulfillment is more important than cost
• 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
• 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 under-valued
• The stock has a large bid-ask spread (more than 5 cents)
• Trading a larger number of shares (more than 100)
Setting Up 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
• Order type (limit order, market order, or another type of order)
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.
For example, 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.
Pros and Cons of Using Limit Orders
Each time a trader does research on a stock and decides to buy or sell shares, they also consider their goals and the current market conditions to decide whether to place a market or a limit order.
Each type of order has pros and cons depending on the particular situation.
• The trader gets to name their price. They won’t end up paying a price they didn’t expect.
• The trader can set the order and walk away. They don’t have to continuously watch the market to get the price they want.
• When trading illiquid stocks, sometimes the bid-ask spread is enough to cover broker fees.
• Limit orders can give traders more control over their portfolio.
• 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 order 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.
• 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.
• Another reason the order may never be executed is 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 a good return.
• The market can change significantly. If a trader sets a long-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 limit order at $154. If the company then makes a large announcement about a new product, a partnership or other positive news, 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.
The Bottom Line
Understanding how to use limit orders to grow your portfolio requires experience and an understanding of the stock market.
If you aren’t quite ready to jump into that level of trading yet, but you want to start building a portfolio, you may want to start by purchasing small amounts of stocks using a trading tool such as SoFi.
SoFi even make it possible to purchase fractional shares, so you can purchase portions of high-priced stocks without a large amount of starting capital.
SoFi Invest has no management fees and a lot of flexibility. You can own many different stocks rather than putting all of your money into one or two high-priced stocks.
SoFi also has a team of financial advisors who can help you set goals and learn about the best ways to reach them.
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