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Limit Orders Trading Tactics

When you're shopping, you probably have an idea of how much something is worth, and more than that, how much you're willing to pay. You might even subscribe to a service that will send you a notification when the thing you're eyeing meets your target price. There's something similar out there for investing, and it's called a limit order.

A limit order lets you set a specific price, called the limit price, at which you're willing to buy or sell shares of a stock, ETF, or options contract. When you set up a limit order to buy, you're setting aside some of your cash just in case the market price reaches your limit - or better. If the conditions are right, you'll be the proud owner of some new shares at a price that you decided was a good one.

Choosing the right price

What is a good price? That's a tricky one to answer. If you set the price to buy shares too far below the current market price, it may never happen. That might be okay with you, especially if it's a buy order. But if you're selling and you set a limit price that's too close to the market price, you could end up selling for less than you might have been able to get, had you held on to those shares. You'll be left watching the market price climb ever higher while dreaming of what would have happened if you'd just held on to it.

A limit order is the only way that you can ensure that you get a specific price (or better) when you're buying or selling shares. But this is not a name-your-own-price service. The market has to be offering shares at your price.

When picking your limit price, it's important to look at the different quotes you are provided with:

  • The last quote is the price of the very last trade for the stock you are looking at. Since the market is always moving, this quote is no guarantee of what you will actually pay.
  • The bid price is what the market is currently offering for investors looking to place a sell order.

The ask price is what the market is currently offering for investors looking to place a buy order. Another quick note - limit orders will stay open for 60 days, and then they expire. Once they expire, nothing happens. It's as if you had never placed an order. The upside to that is that you don't pay commission if your limit order expires.

Once the market price reaches your limit price, your order is processed. On a few rare occasions in a fast market, you could see the market price touch your limit price, but your order doesn't fill (or it fills for just a few shares). That happens for one reason - there were not enough shares at that price to fill your order. This doesn't happen often, but it does happen sometimes, so head's up!

If your order doesn't fill, what happens next depends on your order expiration. It will remain "open" and wait for the market price to meet your limit price, until your order expires. If it takes more than one market session to buy shares (more than one day), you will get charged commission for each day you receive shares for that order.

Stock alerts

We'd feel bad if we didn't also tell you about Stock Alerts. If you're eyeing a security and you have a good price in mind, but you're not quite ready to take the plunge, you can set an alert. We'll email or text you when the stock reaches your price. And if it still seems like a good investment choice, you can go online to place that trade - just consider a limit order if you want a little more control. To set a stock alert, just look for the "Set Alert" link on any stock quote.