Social


8

Why You Should Always Use Limit Orders

Limit OrdersAlways use limit orders for purchasing or selling your shares. This is a simple rule that every DIY investor should use. NEVER use a market order. It’s a simple rule of thumb and one that can save you some money. Jim Cramer is a big proponent of that rule as well.

Why Use Limit Orders?

High frequency trading makes use of machine and we have seen some crashes in the past. If you use market orders, you can be at risk.

Another reason is that most discount brokers show a delayed quote unless you qualify for real-time quotes. I do not even quality for real-time quotes and I have a decent amount invested. Due to the delayed quote, your market order might not be anywhere near the price quoted.

What Limit Price Do You Choose?

Now that we agree on using limit orders, what price do you choose? If I am happy with the market price, I simply pick that limit. It’s possible that price movements have sent the stock up for a purchase or down. You can wait or adjust your price if you really want to sell.

I personally never really use prices far from the market price as when I am ready to buy, the current price is usually satisfactory for initiating or adding to my position.

Readers: Do you use market orders?

Image courtesy of Stuart Miles – FreeDigitalPhotos.net

Sign Up for my FREE Money Tips Newsletter!

8 Responses to "Why You Should Always Use Limit Orders"

  1. Erich says:

    I confess I’m a little surprised that you are concerned about limit orders, since you’re obviously not a trader and based on your 50k transfer purchase recently I’d say you are not too concerned about only purchasing at very low valuations either. Since your purchases are all large cap, relatively low beta companies, I don’t see why you would be concerned about massive price drops in the few seconds between the price quotes you’re getting and the live actual cost.

    Personally I think this is only a real danger with penny stocks and perhaps small caps, which are more likely to have extremely rapid price fluctuation (within less than 15 minutes), and perhaps low trade volume. Yes high speed traders can cause your purchase price to be a few pennies higher maybe, but I don’t see that as a significant risk to anyone but a day trader.

    Personally, with any large cap stock I want to own I’d rather get the purchase in successfully, than try to save myself a few pennies and miss the purchase altogether, and potentially miss a dip in a great company.

  2. […] Passive Income Earner talks about my favorite selling tool: limit orders […]

  3. Paapaa says:

    I think it is totally okay to use market orders whenever you are buying a stock with good liquidity if you see real time quotes. And if you don’t you can safely use limit order with “bad” enough price that will go through. That way you have a safety on and you still get the market price.

    I never understand those who try to shave a few pennies. Usually they just miss the buying opportunity and don’t have ANY shares in their portfolio…

  4. farcodev says:

    Good post. I only used a non limit order, at my first one when I was green. When I seen my error I learnt how to use the limit, stop, and stop limit orders and only use them since and never been disapointed with them. If someone want to buy at any price, good for him/her.

  5. Tawcan says:

    I usually do limit order as well and set the price to my desired entry price. If the stock is cheap already then market price is OK too. The important thing is to get the stock if you think the growth potential is there. In the long run a few cents won’t make that much difference.

    • @Tawcan

      Thanks for your comments. Using limit orders is not so much about the price but about avoiding the potential for a high frequency trader trap or a major drop from a system flaw. You can pick any price but I do most of my purchases using the market price through a limit order. It’s a protection from the systems.

Leave a Reply

Submit Comment
*

Copyright © 2010 - 2014 The Passive Income Earner. All Rights Reserved.
Powered by Liquid Web on Theme Junkie.