Investing Advice

Limit Orders

As you've seen, you are at the mercy of the marketplace when you jump in to buy or sell stock. But to a certain extent, you can control your price. Most new investors place market orders, just buying or selling at the moment's current price. But you can place a limit order, in which you name the price that triggers your order to buy or sell.

For example, say IBM is quoted right now at $80. You decide that if it drops to $76, you'll buy 100 shares. You can give your broker a limit order to buy 100 shares of IBM at $76 or lower (called “better”). This is a “buy order of 100 IBM at 76”. Nothing happens unless IBM's price drops to $76 or lower.

If you want to sell your shares for $90, you would give your broker a sell order for $90. Once again, nothing happens unless the share price goes up to $90.

Many investors, when buying a stock, will immediately place a sell order at a price below what they paid for it. This is known as a “stop loss order” or a “stop sell” or a “sell stop”. For example, if you bought IBM at $80 and wanted to protect your investment, you could give your broker a stop order at $75. If the stock drops to $75, it will automatically sell, thus limiting your loss. As soon as the order is triggered, your broker would sell your shares at the best price available, which may actually be a little lower or even a little bit higher by the time your order to sell is matched with a buyer. A stop order would have protected holders of Best Buy, the nation’s largest electronics retailer, on Aug 8, 2002 when the share price dropped $11.25 to $19.55 in just one day (37%).

When you place a buy or sell limit order with your broker, you specify that it is a day order (for today only), or a GTC order (good till canceled).

Other Stock Market Basics Topics:

  1. Stock Market Basics
  2. Why invest in the stock market?
  3. Why Sell Stock?
  4. How are shares bought and sold on the NASDAQ?
  5. How stocks are traded on the New York Stock Exchange
  6. What are ECNs?
  7. Supply and Demand
  8. American Stock Exchanges
  9. International Stock Exchange
  10. What fuels demand for a stock?
  11. More to Know About Stock Trading
  12. Limit Orders
  13. Market Capitalization
  14. Preferred Stock
  15. How to Buy Stock?
  16. How much money do you need to open a brokerage account?
  17. Money Market Funds
  18. Margin Loans and Investment
  19. Corporation Executive Pay
  20. How much money do you need to open a brokerage account?

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