A limit order is simply a buy or sell price that is pre-determined by the buyer or seller of financial securities. For example, investor Y wants to buy company ABC corporation at a price of $59.30/Share however the current market price is $65.00 per share. A limit order is a choice to only buy or sell at a set price i.e. $59.30 for a buy and $67.00 for a sell. Beware however, market orders can take priority over limit orders potentially causing a limit order to go unexecuted even though a limit price is reached.
There are several types of limit orders including but not limited to buy limits, and sell stop limits. These types of orders prearrange purchase prices and sell prices for securities. This article will illustrate the types of limit orders, dynamics behind placing limit orders and discuss the possible benefits of limit orders to an investment strategy.
TYPES OF LIMIT ORDERS:
Several types of limit orders exist depending on the goals of the broker and/or investor. Additionally, other functions such as the “all or nothing”, and “fill or kill” options can be used to avoid only partial execution of limit orders.
*Buy Limit order: Sets maximum price a purchase will take place
*Sell Stop Limit order: Sets minimum price a price may fall before selling
*Trailing Stop $: A moving stop loss that is proportionate to dollar difference from a moving market price
*Trailing stop %: A moving stop loss that is proportionate to percentage price difference from a moving market price
HOW TO PLACE A LIMIT ORDER:
To place a limit order an investor, trader or speculator must do so through a brokerage account that deals specifically with the type of securities being bought or sold. For example, if investor Y wants to buy stock options through the Tokyo stock exchange using limit orders the brokerage institution must be equipped to do this. The funds available must be present and the number of shares and corporation name are entered into the brokerage account ordering system. The option to buy at a limit is one of several types of order features including market orders, and the time period with witch the order remains valid.
If an investor or broker is dealing with options, limit orders can also be used. The investor or broker can place a limit order to either buy or sell options at a specific price. The prices vary based on the current market price of a security and the exercise price of the option among other factors. Typically, market orders and standard limit orders are less complicated.
When using online trading platforms the limit order option should appear near the order type field in the transaction page of the online brokerage account. Depending on which brokerage is used, the number of shares purchased, frequency of trading, cost of purchase etc. different brokerage firms will charge different fees for the transactions.
LIMIT ORDER STRATEGIES:
*Limit loss: By placing sell stop limit order loss on devaluation of a security can be held within a certain price range or percentage. This can assist the investor conform orders to risk tolerance and overall investment strategy.
*Tax hedge: Using the above example, on Monday, December 31 investor Y decides he can lower his tax bracket by selling 100 shares of ABC corporation at a limit price of $55.00. Since his purchase is below his purchase price his decision to sell at a set price before the end of the year will enable to recapture some of his capital loss through tax savings.
*Target price acquisition: Through a limit order a buy price can be established to trigger the purchase of security once a price reaches the limit price. This can assist in meeting price purchase goals.
*Limit order options trades: Using limit orders in option trading can help maximize gain and/or minimize loss. Since options are leveraged investments the use of limit orders can may be helpful.
*Limit Timing: Timing a limit order may lead to a successful or unsuccessful execution of the order. For example if a price limit of $50.00 is placed with a buy order with an expiration of one day and the day’s price range never falls below $52.00, this order will go unexecuted and expire. Thus, placing a long enough time period and/or close enough price to the market price may facilitate a more successful execution of the limit buy order.
SUMMARY:
Limit orders are a stock buying method that assist the broker and/or investor in achieving a desired price range whether it be to buy, sell or trade options. The limit order is a feature of securities trading that fixes pre-determined buy and sell prices so as to achieve several functions. Some of those functions are listed below:
*Automates the buy and sell process
*Facilitates timely trading
*Enables price selection
*Helps lower losses
*Allows the broker and/or investor more time to perform other tasks
Several strategies can be enhanced through the use of limit orders specifically limit loss, tax hedge, target price acquisition, options trading limits and limit timing. Developing these strategies involves becoming familiar with the types of limit trades, their purposes, how well they execute and their implications on other investment options. Not all limit orders execute and a large limit order may only partially execute depending on the number of shares requested and the extent of time the security stays in a specific price range. In such instances additional commands can be used such as the ‘all or nothing” option.
The execution of a limit order requires the stock, security or stock option to meet the trigger point for the limit order to execute. This point is usually the price or lower if a buy order and the selling price of a stop loss for a stop loss limit. There are several advantages to using limit orders that may help improve an investment strategy, market timing and price selection however the risk with limit orders is that money tied up waiting for a limit order to execute may stand the chance of being better invested elsewhere.