Limit Orders & Order Types You Should Know

Day trading in a fast-paced stock market can seem overwhelming. Luckily, stock traders are given options for trading orders based on their experience and goals. We’re here to offer a bit of investment advice on these order types. In this article, we’ll break down the order types that exist, how they’re used in today’s market conditions, and the pros and cons of each.

Order Types

Limit Orders

A limit order is a stock order that allows traders to set a specific price for their stock when they buy or sell shares. This is overall the best option if you want to have more control over a stock’s price. However, this does not mean that your limit order will carry out. There must be enough shares at your limit price along with willing buyers and sellers.

These orders branch off into two categories:

1. Buy Limit Orders – Orders will only become active when the stock hits your limit price or lower.
2. Sell Limit Orders – Orders will only become active when the stock hits your limit price or higher.

Market Orders

A market order is created when the trader wants to pay the specified price of a stock set by the current market conditions. Unlike limit orders, market orders don’t give you control over the stock’s price.

Stop-Loss Orders

Stop orders, also known as stop-loss orders, are placed when the trader feels their stock’s price might continually decrease. While limit orders are placed to capture gains, stop orders protect from price falls.

Stop-Limit Orders

It’s important to note that limit orders and stop orders can be used simultaneously. This is what we call: Stop-Limit Orders. Two prices are involved, a maximum price and a minimum price, surrounding the current stock price. This gives you an extra level of control over your entire order.

Using Limit Orders vs. Market Orders

As a trader, you’ll want to know whether a limit order or a market order is the best decision for your stock. The following are reasons you’d choose a limit order:

• The stock being traded has high volatility (the fluctuation of stock’s price). Placing a limit order will help you retain control.
• Potential for a higher price with long-term opportunities. Limit orders can stay open for months or even indefinitely. Long-term traders prefer this option.
• You want to speculate on the market. Which essentially means you think a stock is undervalued. Setting a limit order allows you to wait for the stock to reach a better price.
• Buying or selling towards the end of the market day or at market close. The day doesn’t end when the markets close, company and world events still occur after hours. Setting a limit order protects your stocks from being affected when the market reopens.
• The stock doesn’t have a lot of liquidity (the rate stocks can be bought or sold without affecting the current market price). When there aren’t a lot of people trading the stock, one order can affect the market price.

However, limit orders might not be the best option for your portfolio or style of trading. These are the instances in which you might choose a market order instead:

• Prefer to quickly get your order filled regardless of price.
• You are only trading a small number of shares.
• The stock is highly liquid. A ton of people are currently trading the stock.

Pros & Cons of Limit Orders

The Pros

1. Choose Stop Price

As a trader, you get to choose the price your stock reaches, a stop price. And only when the stock reaches that price will the transaction go through.

2. Avoid Unexpected Prices

Since you're able to set your own prices, you don’t have to worry about paying last-minute adjustments.

3. Expiration Date Included

This allows you to set the open order with an expiration date, giving you the freedom to monitor as you please.

The Cons

1. No Guarantees

There is no guarantee of getting your order filled. You may set a price that other traders don't want to meet.

2. Higher Risk

It can be risky for novice investors. It takes experience monitoring the market in order to set appropriate prices.

3. Quick Loss

You can experience loss quickly. The stock market changes at a rapid pace, never truly estimating price reaches.

Setting Up a Limit Order

Now that we’ve given you a crash course on limit orders, it’s time to decide if a limit order is the right path for you. If it is, here are the steps to set one up:

1. Navigate to your trading platform or brokerage.
2. Figure out which stock you wish to trade. Consider stocks you own and are worried might decrease in value. Also, consider stocks you want to purchase that might decrease in value.
3. Set your limit price. This will be the highest price you’re willing to pay for a stock or the lowest price you’re willing to accept for a stock you already own.
4. Select your duration. As we mentioned before, this length can be anywhere from one day to indefinitely. Setting a good-til canceled condition is recommended. This just means that the order is effective until filled or canceled by the investor. It all depends on when you think your limit price will be reached.
5. Submit! Don’t forget to check on your order regularly.