Buy Limit Order - A Simple Yet Essential Part Of Investing
What is a Buy Limit Order?
A buy limit order is an order that you place to be executed by your broker at, or below, the price you want to buy a stock for. These trades will not be executed until your preferred price is reached. Your order might never be filled by your broker because the stock price might have ran up so fast that the price moved above your order before it could be filled. If a stock gaps up the next morning and you placed a market order the night before,your order would be filled while the price was high. But if you placed a limit order instead, you could have been filled at a much lower price which would make your profit larger.
Here is an example.
The current stock price of company XYZ is $10.30. You want to purchase XYZ stock but do not want to pay any more than $10.27 per share. You would place a limit order at $10.27 for xxxx shares of company XYZ. Your order will not be executed until the stock price drops to, or below, $10.27 per share.
Pros Of Using A Buy Limit Order
You can maximize your profits by not chasing the stock price, like you might do with a market order.
You do not pay for the the trade unless it is executed.
Great for buying in at a support level if you use technical analysis trading.
Great for investors who do not sit at a computer throughout the trading day.
Cons Of Using A Buy Limit Order
You will not get your order filled if the price does not reach your desired price, which means you have no shares if the stock rebounds and the price goes up.
Your broker might charge an extra fee to use this type of order.
You should generally use a limit order when placing your trades to get the best price for your stocks and some stock brokers even require you to use it when buying penny stocks. If you can learn to place your order at a reasonable price, you should be able to get your order filled without a problem. Buy limit orders can be your best friend when it comes to your trading career, not only will they help you maximize your profits but they will also keep you away from paying a ridiculous price for a stock.
by: Steven Miller
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