Stock Limit Orders and How They Work

This week I have tackled everything from market liquidity to market orders to the process of making a stock trade online. And, since we already covered market orders, I figure it is only appropriate to explain limit orders. The blog hit another new high of subscribers, with google reader being most popular, and the 101 talk is only going to continue to come your way! Now for these limit orders…

If you recall from my explanation of market orders, you will remember they are orders that allow you to buy or sell shares of stock NOW. Whatever the best price is available at the second you place that order is the price you are going to get. There is a disadvantage to this though because of this fact that you are getting whatever is there at that moment, but what if only want to pay a specific amount for your shares or sell them for a specific amount? That's where limit orders come in!

Limit orders are stock orders that allow you to buy or sell shares of stock at a pre-set designated price OR better. So let's say we want to buy Microsoft stock, which is currently trading at at a last of $30.27 per share, but we only want to pay $30.00 or less for our shares. When we place the limit order and fill our the trade ticket, we basically say, "hey, I know Microsoft is trading above $30 per share right now, but if the price comes down to $30 or lower, automatically buy me in please".

What then happens is your order goes into a electronic system that will automatically buy the shares you desire at $30 or less per share. You can have the order set up to expire at the end of the day, end of the week, end of the month, or never, it doesn't matter. Also, you do not need to be present when the order takes place. With market orders we buy or sell because we want it done NOW, whereas some limit orders may take weeks to fill.

One other thing to know about limit orders is that 9 out of 10 times they will cost the same as a market order. It all depends on your online broker, but any of the major online brokers will charge you the same price as a market order. Some professional traders recommend ONLY using limit orders to make your trades because you can get the price you want or better. I agree with this, but there will always be situations where I don't care about the extra few pennies, I want my shares NOW.

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