We like the concept of using a “limit” order for any stock purchase where we are not physically sitting in front of our computers and watching the action. So first, what exactly is a limit order? A limit order allows you to indicate the exact price (within a couple of cents) at which you are willing to buy a stock or “below”. For example, let’s say you want XYZ and it seems to be moving fast. It was 50.50 a few minutes ago and now it is trading at 51.75 Well, we know that a “market order” allows market makers to play too many games, so to short them, we would use a limit order. Here we would say to ourselves “XYZ is moving well, but I don’t want to get stuck in the market. It is at 51.75 and I would be willing to buy it up to $52 and no more.” So we would tell our broker (or use the correct “buttons” to do it online) that we want to place a “$52 limit order on XYZ”. What we’ve done is this, we’ve said that XYZ can still move while we’re on the phone and as long as it doesn’t go over 52, we’re still willing to buy it. If it moves above 52, we think it has gone too far to remain attractive. So your order will go on an electronic “book” and will be executed as long as XYZ stays below 52. If XYZ “runs away” or in other words goes above 52 while you are on the phone or on your computer , your order will not be executed. “shoot”. Next time we will discuss the 2 basic types of limit orders you will come across.
There are two “basic” types of limit orders that you will encounter. First, the brokerage will ask “is this a day order or a good one until cancelled?” Now what is that all about? Well, when you tell the broker that you’re willing to buy a stock at 52 or less, he needs to know if you mean just “today” or until you call him back and say “never mind”, which may be until 60 days. later. The broker will leave your buy order on the books for about 60 days.
and if XYZ falls below 52, your order will be triggered and executed. Personally, we don’t use GTC orders (good until canceled) much because we’re “too involved” to not know when it’s getting below 52, we usually specify a “day order only”.
The best reason to use limit orders is that you are in control of what you are going to spend on a stock rather than the market maker “filling” you where he wants. But there are also problems with limit orders. If an action is really moving fast, it means a ton of people are piling up and even though 1/2 point of leeway has been given, the action can “outrun” it or in other words go over its limit before it your order is executed. especially early in the trading day we see the stock gain a couple of points in a matter of a minute or so Here your limit order probably won’t do you any good because stocks are moving so fast you would have to put a limit which is 3 or 4 points more than you really want to pay, just for the chance to get in. That’s why we often say, let the first few minutes of madness play out before you try to get involved in buying anything.
One last note on limit orders. As you know, a stock has a range in which it will “move” during the course of the day. XYZ can open at 50, go to 51, go back to 49.75, launch at 51.50 and end the day at 50.75. So one way to play XYZ is to watch its daily range and place a limit order at or just below its lower range. For example, if we see that XYZ generally has a full point of “move” during the day, and at 10am it is trading at 50.50, 3/4 up for the day, why not place a limit order at say 50? So if during one of his wiggles he drops to 50 before going back up, you’ll get it. (Keep in mind, of course, that you would only do this if you’re not in a big hurry to get XYZ, you might not get down to 50 and never get it.)
The bottom line is that limit orders will hold market makers a bit longer
“honest” when it comes to your fills, and you won’t risk stocks being filled at a ridiculous price you never would have paid. We urge you to use them, and with a bit of experience, you should have a pretty good idea of how much “room” you should give a stock. The last thing we want to say is this, if you place a limit order for XYZ for 52 and it never reaches 52, the market rules say it must be filled “in order” (first come, first serve). So don’t be mistaken in thinking that your limit is your price. Remember that a limit is the “maximum” price you are willing to pay, but if XYZ is at 50.50 and your limit is 51, you will get XYZ at 50 1/2 when your “turn” comes. The limits just prevent you from ordering hot stock that’s running low and you think you’ll get it at, say, 90, and when you check later, you find you bought it at 98! That is what can (and does) happen with “market orders”.
