Stock prices are volatile. Even within the course of a single trading day, a stock may go up or down a few percentage points. To get the best return, you'll want to buy a stock at the best price. The way the stock market trades up and down, you can often get a certain price if you are willing to wait for it. But you'll have to enter a specific type of order to get your price.
If you are hoping to buy a stock at a specific price point, you can use a limit order in order to ensure that you achieve the best possible acquisition based on your preferences.
Understanding Limit Orders
A limit order requires you to specify the price you are willing to pay for a stock. If the stock never trades down to that price, your trade will never execute. This is the risk you'll have to accept if you're trying to wait for a particular price.
To enter a limit order, tell your broker what price you are willing to pay, or enter it online via your firm's trading website. For example, if a stock is trading at $50 per share but you're only willing to pay $45, you'll enter $45 as your limit price. That order will stay on the books until the stock trades down to that price or the order expires, whichever comes first. Limit orders expire at the close of business on the day you enter them. You can extend this expiration date by making your order "good-til-canceled." A GTC order expires at the discretion of the firm accepting the order. Typically, these orders last 60 days or longer.
If you wanted to sell a stock at a specific price, you could also use a limit order. For sales, you'd enter a price above the current stock price, and your sale wouldn't trigger until the stock reached your price. For example, you might put in a sell limit order at $50 if a stock is trading at $45, hoping it trades up to your target price and executes.
Exploring Market Orders
If you're happy to buy a stock at the current price, you can enter a market order. Unlike a limit order, a market order executes immediately. A market order eliminates the risk that a stock never trades down to your limit price. In a rapidly rising market, a market order might be the only way to buy a stock.
Evaluating Stop Orders
Stop orders are hybrid orders that combine aspects of both limit and market orders. To enter a stop order, you'll have to specify a price for a stock. Once that price is reached, the order becomes a market order, executing at the next available price. While similar to limit orders, stop orders do not guarantee a certain price; they only specify the price at which the order becomes a market order.
Defining Stop-Limit Orders
If you still want to specify a price, you can enter a stop-limit order, which becomes a limit order once the stop price is reached. For example, you could enter a stop-limit order with a stop price of $40 and a limit price of $38. Once the stock trades down to $40, the order becomes a limit order that will not execute unless the stock hits $38.
- Prices can change rapidly in fast-moving markets. This means that market orders could fill at prices significantly above or below what the prices were when you placed these orders. In these markets, place limit or stop-limit orders because they would fill at your specified limit prices or better.
- Short sellers might need to buy back and cover their short positions at certain price levels. They could set stop or stop-limit orders to minimize losses or to protect profits. These stop orders will trigger once the stocks hit the specified stop prices, and the short sellers would be able to cover their positions without incurring significant losses.
John Csiszar has written thousands of articles on financial services based on his extensive experience in the industry. Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to his online work, he has published five educational books for young adults.