In the ideal world, we would be able to predict exactly when to buy or sell our stocks. If I had a time machine, I would go back to March 2020 and load up on all my high-conviction stocks. Unfortunately, time-traveling is not possible. But, luckily we have limit orders to make sure we don’t leave money on the table.
Knowing when to invest is tricky, especially when we do not know if our stocks will print money for us or drain our bank accounts. Instead of constantly stressing over the unknown, simply log into your brokerage and set specific price points you want to buy or sell your stocks at. That way, you can take a breather without worrying about missing the next rocket to the moon.
To make the most of your investment experience, you need to understand what limit orders are, how they work, and their advantages and disadvantages.
- Limit orders allow you to execute your trades at set price points regardless of current market prices. On the other hand, market orders execute immediately at the next available price.
- While limit orders ensure you get the best prices for your trades, they make take weeks or months to get executed or fail to execute if the difference between the market price and your desired price is too big.
- We will go over some real-life examples of limit vs market orders and how we use them in our day-to-day investing and trading strategies.
Understanding What is a Limit Order in Stocks
If you want to use a limit order to purchase shares of stock, set the price to be at or below the maximum price you want to purchase the stock at. For example, if you want to purchase shares of Apple at $130, you would set a limit order to purchase the shares at your limit price of $130 or less.
If you want to sell a stock, you would set the price to be at or above the sale price that you want. If you believe that Apple shares will peak at $200, you can set a limit order to sell your shares at your limit price of $200 or more.
Generally, it is more profitable to use a limit order compared to a market order. Market orders execute immediately at whatever price is currently available in the markets, meaning you do not always get the best price. On the other hand, your limit order may take some time to get filled or may not get filled at all if there is a huge discrepancy in the price you set and the current market price.
Advantages and Disadvantages of Using Limit Orders
Pros of Placing a Limit Order
When you set limit orders, you can buy stocks during a dip or sell them during a peak. For example, if you have done some fundamental and technical analysis to determine when to buy and sell your positions, you can simply set the desired price targets and wait for them to hit. You do not need to check the market prices every hour or day to see if your price point gets reached.
You also ensure that you get better deals when you make a trade by setting limit orders. With market orders, there is no guarantee that you will get the best price, particularly if there is a large difference between the bid and spread. For example, if the volume is low for a stock, you may need to adjust your price drastically to find someone to trade with.
Cons of Placing a Limit Order
Your limit order may never execute and you run the risk of missing out on any potential gains you could have made had you bought or sold the stock at its market price. If you set your price targets too far from the current price, you may have to wait weeks or months for the stock to hit your price points. That can cause you to feel stressed or distracted until your order executes.
If you are strapped for cash, setting limit orders may negatively impact your portfolio as your money is in “limbo” until the order executes. If you sent limit orders that are Good ‘Til Canceled (GTC), your money can be put on hold for several months. Depending on what types of stocks you are purchasing, you may miss out on dividends you would have received had you placed a market order.
You want to buy shares of Microsoft stock, but you believe the current price of $348.32 per share is too high (as of November 2023). You see that the price of Microsoft stock was $315.92 a month ago and you believe the stock will fall to that price again. You log in to your brokerage account and place a limit order to buy Microsoft stock for $316 per share.
That means your order will only execute if the price of a share is $316 or less. Since it may take some time before Microsoft stock falls to that price, you place a GTC order, allowing the order to remain open until the stock order is filled or you cancel it.
Alternatively, you already own Microsoft stock and want to sell some shares, but you believe the current price of $348.32 per share is too low. You think the price can run up to $400 per share in the new few months. So, you log in to your brokerage account and place a limit order to sell Microsoft stock for $400.
That means your order will only execute if the price per share is above $400. Since it may take some time before Microsoft stock falls to that price, you place a GTC order, which will allow the order to remain open until the stock order is filled or you cancel the order.
Frequently Asked Questions
What is the difference between a market order and a limit order?
A market order is an order to buy or sell a security immediately. This type of order guarantees that the order will get executed, but does not guarantee the price. A limit order is an order to buy or sell a stock at a specific price or better.
Is a market order or limit order better?
Neither, as either order can be more appropriate for a given trading situation. If you have the funds, don’t be afraid to use both.
When to do a market versus limit order?
Either order can be more appropriate for a given trading situation, but consider using a market order when you want the stock trade to execute as soon as possible or if you’re only trading a few shares. A limit order may be more suitable if you’re looking for a specific price or you’re trading a large number of shares. Note that you can place multiple limit orders at various prices for the same stock.
What are some assets I should consider placing a limit order for?
Cryptocurrencies are extremely volatile assets and you will have a greater success of hitting the limit orders you place. At the beginning of 2021, Bitcoin was trading between $30,000 to $40,000. In March and April 2021, Bitcoin was hovering around $60,000. And now in November 2023, Bitcoin has fallen to around $34,000. If you want to buy Bitcoin, we recommend placing a limit order. Conversely, Apple is a stable blue-chip company. A buyer considering purchasing Apple stock may want to make a market order since the price is relatively stable.
I regularly use both market and limit orders to buy securities as both are beneficial to my goals.
I placed a sell limit order on five shares of Home Depot stock as I saw it trending upwards toward the end of April and early May 2021. Although the price was around $336 on May 6th, I was confident it would reach $340. So, I placed a limit order for $339.75 and saw the trade was executed later that day. It wasn’t too long before the price dropped, and as of November 2, 2023, the price of Home Depot stock is $294.53 per share.
In early March 2021, I noticed that TJX stock dropped to below $63 (it had been over $70 in late February 2021) and subsequently bought some shares via a market order. Sure enough, the price picked back up and reached $68 in a few days and even reached over $74 in early May 2021. As of November 2023, the price has risen to $89.92.
The Bottom Line
Limit orders allow you to place an order to buy or sell a stock when you are not satisfied with the current market price. But, you risk your order not executing. If you don’t want to deal with these unknowns, place a market order, which usually executes immediately. And remember, you can always use both market and limit orders. Use context clues to apply the right order for your goals.