In a previous post, the “market” order was discussed – if you haven’t done so, please read that post first.
If you want to buy an ETF (exchange traded fund) or a stock online, it is important to learn about market orders and limit orders. One of the potential problems with a “market” order is that you don’t have any control of the price. If the ETF or stock you are trading is thinly traded, then you might get a poor price.
A “limit order” takes care of this problem – basically you enter the trade like you would a “market” order but you also enter a “limit” which is the maximum price you are willing to accept.
Buy order limit example
If you want to buy a stock and the last trade was for $50, you might enter an order for 100 shares with a limit of $51. This ensures that the highest price you will pay for the shares will be $51. This doesn’t mean you are bidding $51 – the order is still considered a ‘market’ order with a limit so you will get the current price which will hopefully be less than $51.
Sell order limit example
If you want to sell an ETF and the last trade was for $60, you might enter an order for 50 shares with a limit of $59. The sell limit is the opposite of the buy limit – you are instructing the brokerage to get the best price possible for the shares but don’t accept a price below $59.
No guarantee order will be filled
If you enter a buy “market” order then it is very likely that the order will get filled as long as there is someone else selling the same shares at that time. If you use a limit – then it is possible the order will never get filled.
Photo by Noodlz55