Tag: Limit order

  • Limit order vs Market order – When and How to Use

    Limit order vs Market order – When and How to Use

    3 min read

    Limit order vs Market order - When and How to Use

    When you are buying or selling a stock, you have two main ways to define the price you want to trade. You can choose the market order and the limit order. If you choose the market order, you trade the stock at the current price, whatever it is. By using a limit order, you can set a price and when the stock meets it you can say the trade is executed.

    This is the basic difference. But to understand more, several things must be taken into consideration.

    Limit order gives you the price you want

    The benefit of the limit order is that you can set your price. When the stock meets that price, the order will be executed. It is usual to set a limit order to be executed in a frame of 3 months after you enter the position.

    A limit order can be placed for buy or sell a stock at a particular price. A buy limit order will be filled only at the limit price or below. Hence, a sell limit order will be filled at the limit price or more expensive. For example, you want to buy the stock at $20 or less and you place a limit order for this sum. The order will be executed if the price of the stock is at $20 or below.

    The disadvantage is that you are not promised to trade the stock.

    In case the stock never hits the limit price, the trade will not be executed. 

    The other problem may arise if there is not adequate demand or supply to fill the order. That could be the case with illiquid stocks Also, the stock price may change during the 3 months and your trade may be fulfilled at a price extremely changed from what you could have made.

    For example, you want to sell some company stock at, say at $90. Those stocks are suddenly traded from $85 up to $120. But your limit order is at $90. So, what can you do? Be informed on a daily base to avoid to end up with less money when you can get more.

    The opposite can occur with a limit order to buy. You may be forced to buy at a costlier price than you think the stock is worth.

    Use a limit order when you want to name your price a much different from the current. The other reason, you aspire to trade stocks that are illiquid. Also in the case when the bid-ask spread is great or you are trading a large number of shares.

    A market order is executed quickly

    The biggest benefit of a market order is that it can be executed quickly since you are choosing the best price possible at that time. The market order will be executed no matter what price the seller is asking or the buyer is offering.

    The most important disadvantage of the market order is that you can not determine the price of the trade.  It may influence if the price changes fast which could lead you to end up trading at a much-changed price from when you placed the order.  

    For example, you placed the market order after the closing hours. Suddenly, over the weekend, the stock price increased. What you have to do is to cancel your market order before the market’s opening.

    Also, the lack of buyers or sellers able to cover your order may cause the price to increase or decrease.

    Use a market order if you want an immediate fulfilling at any price or you are trading an extremely liquid stock. Also, if you trade several shares, meaning less than 100.

    Limit order vs Market order

    Limit orders will help you to save money on commissions. But you can save your money by a buy-and-hold approach to your investment. 

    Both limit order vs market order has its drawbacks and advantages. The final selection depends on you. The limit order can be expensive. A market order is simple to execute but can be a difficult choice during volatile market circumstances.

  • Limit Orders – Use Them to Buy or Sell Stocks

    Limit Orders – Use Them to Buy or Sell Stocks

    3 min read

    Limit Orders - Use Them to Buy or Sell Stocks

    The limit orders are a type of orders in the stock market that lets traders to sets the wanted price at which they want to buy or sell the stock. In this way, the traders have more control for the execution of price, especially during the volatility. Possibility to specify their own price by using a limit order is a better choice than a market order. By using the market order traders can only choose the price but not to define it.

    A limit order can be modified until it is completed.

    It is intentionally practiced to get a guaranteed better price. So, it has to be put on the exact side of the market.

    Buy and Sell Limit Orders

    Buy limit order must be set at a price lower than the current market price. Hence, the sell limit order has to be set at a price higher than the current market price.

    For example, you want to buy 100 stocks, but you have a limit of $30 or below. If you want to sell that stocks at $35 that will not happen until the price of $35 is reached or it is more than $35.

    A limit order means that you want to sell or buy some stocks only at the price which you put in your limit order. 

    It differs from a market order because the market order fulfills your buy or sell transaction instantly despite the price. Honestly, sometimes brokers don’t like limit orders. Your limit order will have good treatment only if the price is the best ask or bid price and your stocks will be sold very fast. But, if it is not, well, you will wait to come to the top of your broker’s list.

    Some traders believe that limit orders have some defects but the others are convinced they are their best weapon. The most important feature of limit orders is that your order will be executed only at the price you placed, or better.

    How to place a trade

    How to Buy or Sell Stocks by using Limit Order

    Chart Image Source: StreetSmart Edge®

    A limit order has five elements buy or sell as the first, number of shares, security, type of order and price.

    For instance, if you want to buy 100 shares of stock and you want to pay $35 each. Your limit buy order would be expressed as –  Buy 100 shares (ticker symbol should be added) limit $35.

    This order indicates the market that you want to buy 100 shares, but without a doubt, you will not pay more than $35 per share.

    The benefit of the limit orders is that your order will not be filled above the price you set but the price may drop and you can pay your shares at a cheaper price, lower than $35 as you placed. So, you see, the limit orders are not fixed orders.

    The same thing comes for a limit sell order. When you open a limit sell order for $35, your stock will not be traded for less than the amount you set per share. When the stock grows over the set price before your order is fulfilled, you may earn more because the stocks you want to sell reached a higher price before the transaction was executed.

    You will need the experience to recognize where to set limit orders. First, never set limit buy order too low. Why is that, you don’t have money? If you do that who will sell you the stock at that too low price? In that case, your order will never be filled. 

    The point of using limit orders is to protect yourself from buying a stock at too high or selling at a too low price. Keep in your mind, if the stock’s price never meets your limit price, your trade will not be executed.

    The limit order could be a problem if you don’t pay attention to the market. 

    Here is a strategy, not very creative, but works.

    Let’s say you placed a sell limit order at $3 over the market price. At the same time, you set a buy limit order at $3 under the market price. You will make a profit in any scenario.

    But what if the price jumps for $10 per share?

    Sadly, you missed the additional $7. Can you assume the opposite of this situation? The stock fell and your buy limit order was fulfilled as the stock was in a drop.

    Limit orders are wonderful tools, but they are not absolutely sure-fire. In a volatile market, limit orders may be painful due to the possibility to be executed too soon.

    The best way is to set a limit order that is not connected to daily price changes. The point is to have even minimum control over the price.

  • Types of orders execution – How to Buy and Sell

    Types of orders execution – How to Buy and Sell

    Types of orders execution - How to Buy and Sell
    There are different types of orders execution and each of them has a strictly defined function.

    By Guy Avtalyon

    Types of orders are market orders, limit orders, and stop-loss orders.

    So, you have to understand what happens when you click the “enter” button on your online trading account. Your order isn’t always filled immediately, you have to know that.

    The variety of potential ways in which an order can be filled can be surprising.

    How and where your order is executed have an influence on the cost of your transaction and the price you pay for the stock.

    Types of execution orders  

    • Instant Execution

    These execution types of orders type mean the broker guarantees to carry out the order at the price set by the trader or not to execute the order at all.

    The trader can set a slippage or a maximum allowable price deviation or at which the order can be executed.

    When it happens that the price has varied during the processing request but still remained within the set slippage, the order will be executed with a price correction.

    In the case that the price has gone beyond the limits of the slippage corridor or the slippage parameter has not been set, the order will be rejected. Therefore, the trader will receive a €œrequote€ price change message.

    In such a situation the trader can accept the new price and the order will be executed or can refuse the order.

    The advantage of instant execution as types of orders is the opportunity to enter the market at a fixed price. Hence, that is of great importance for some trading strategies.

    Also, the main disadvantage of instant execution is ‘requotes’. Their number of which increases or decreases depending on the volatility of the market.

    • Market Execution

    This execution type practically allows any order from the trader will be executed at the current price on the market at the moment of order processing. The price can be either higher or lower than the one the trader can see in the window of the screen.

    As a rule, the trader accesses the market quicker when using market execution. The foremost benefit of this execution type is the chance for 100% market access.

    Its disadvantage is a high risk of a lossmaking position when the market is highly volatile, when the price may strongly fluctuate during short periods of time.

    What are the different types of orders

    Market order

     

    This is an order for buying or selling security quickly. Market order guarantees that your order will be executed, but does not guarantee the price you’ll get. This order will execute at or close to the current bid or ask price.

    Yet, it is important for you to remember that the last traded price is not certainly the price at which a market order will be executed.

    A market order is the most common type of order and it is almost always filled because no price is defined.

    Limit order

    This is an order to buy or sell a security at a specific price, which is called limit, or better.

    A buy limit order will always be executed at the limit price or lower.

    The sell limit order will always be executed at the limit price or higher.

    For example, if you want to buy shares of ABC stock for no more than $20. So, you can set a limit order for this price level and your order will only execute if the price of ABC stock is $20 or lower.

    Limit orders are suitable only for investors who strictly determined the price at which they are willing to trade.

    Stop order is one of the types of orders

    Stop order is also known as a stop-loss order This is the type of order that allows traders to buy or sell a stock once the price of the stock reaches the specified price, known as the stop price. When the stop price level is reached, your stop order will become a market order.

    Buy stop order

    This means, entered at a stop price above the current market price. Use a buy stop order to reduce a loss or protect a profit on a stock that you want to sell short.

    A sell stop order is entered at a stop price lower than the current market price. Use this order to reduce a loss or protect a profit on a stock you own.

    GTC or Good till canceled

    This is a modification of a limit order. Traders use it either to buy or to sell a security. This type of order remains in force until it is canceled by the customer or executed by the broker.

    Fill-or-Kill order

    This type of order is sent to the floor for immediate execution. If it cannot be filled immediately, it is automatically canceled.

    AON All-or-None

    In this type of limit order, the broker is focused to attempt to fill the entire amount of the order or none of it. This order differs from a fill-or-kill order because, with an all-or-none order, here is no requests for quick execution.

    Are orders execution so mattering?

    The importance of orders execution depends on the type of order you submit.

    For example, if you are putting a limit order, your risk is the order might not be filled. But, if you are setting a market order, speed and price execution is more critical.

    You have to know, the execution is no backup for an investment plan.

    Today’s markets include real risks, therefore they can cause the execution of orders at prices significantly different than anticipated. But, with a long-term extent, these varieties are only one step on the road to successful investing.