Trading in stocks can seem to be an easy task, but when handled carelessly, can spell doom for all the parties involved. To make the most of your investment portfolio, you need to have a good grasp of how the stock market works. The two commonly used trading methods are the Market Order and Limit Order.
In this article, we will be talking about the reasons why it’s smart to set the Buy Limit Order. However, let’s take a quick look at the market order and limit order.
A market order is used to trade a stock at the best price available in the market. A buy limit order is an order to purchase a security when it is trading at a particular price or below that price, allowing investors to choose the specific price they intend to pay for the stock. By selecting to use the buy limit order, the investor has a guarantee of paying the specific price or less for the purchase of the security.
Advantages of using A Buy Limit Order
The main edge which trading with a limit order has over a market order is that the limit order gives the investor a guarantee of purchasing a security at a particular price chosen by the investor. A market order does not provide the trader this guarantee because while it ensures that the trader’s order is filled, it does not specify a price at which the order should be filled. For a market order, the securities are purchased at the offer price; a buy limit order is listed on a broker’s order book at a specific price.
This has the same results as placing an order at the bid, a sign that the trader wishes to purchase a specified number of shares of the stock at a specific price limit. As the value of the stocks moves down toward the limit price, the trade is executed when the specified price becomes the inside bid, ensuring the trader buys the stock at the lower bid price thus avoiding negative spilling. Short-Term intraday traders who want to enjoy small, quick profits in fast moving markets take advantage of this operation. For large investment firms who make huge long term commitments, incremental limit orders at different price levels are employed to achieve the best possible average price for the order as a whole
A limit order is better if you intend to buy a certain stock but think it’s currently overpriced. You only need to set a lower “limit” at which you’ll purchase. If it reaches that limit, the order will be executed, and you’ll purchase the security. If not, your order will expire and will not be filled.
If you are purchasing the stocks of a large blue-chip company, the market order is the right choice. However, if you are buying the stocks of a small- company that trades only a few shares per day, then it is wise to set a limit to prevent getting a bad price.