3 Reasons why Limit Orders can be your Best Friend

What are limit orders?

To give you some background, in the stock trading world, a limit order is an order you can place in advance to sell a security at a certain – or better – price. For example, if you own a stock and you set a limit-sell order at a particular price, the order will execute as soon as the stock price is equal to or greater than the particular price. Conversely, if there is a stock you’d like to purchase at a certain entry point, you can place a limit-buy order at a particular price, which will execute that order if and when the stock price is equal to or less than the particular price. Example: TSLA stock is currently $567 and you want to buy it only if it can be had for $500 or less. You should set a limit buy order for TSLA at $500. If and when TSLA drops from $567 to $500 or less, your order will automatically execute.

1. Autonomy

One of the most advantageous highlights of limit orders is the ability to not have to babysit your portfolio. For this exact reason, many investors opt to purchase index funds as a “set-it-and-forget-it” strategy. However, some investors do elect to pick individual stocks and manage their own customized portfolio. Maybe you are the first or latter type of investor, and don’t necessarily monitor the live market price of your stock all day, every day when the market is open and want to minimize any chance of you missing the right opportunity to purchase or sell a particular stock. Limit orders can solve for this by serving as an avenue for you to dictate a future transaction based on a stock’s price. It’s like having your own assistant whom you’ve instructed to execute orders based on your price requirements.

2. exact price execution

Perhaps you wish to execute your trade at a particular price based on a mathematical analysis. Maybe you’ve computed the perfect price for a stock to be worthwhile selling at to lock in a profit, or a perfect round number to purchase a stock for. The market prices move very quickly, so sometimes the best way to make such a trade at a fixed price is a limit order trade.

3. Remove Emotion from the Game

A third benefit of limit orders is being able to trade in isolation from your emotions. When you see a stock or your portfolio going up or down or just being outright overly volatile, you may be likely to make impulse decisions. Rather than allowing these emotions and impulses influence your decision, a limit order can be a means of executing the trade based solely on your planned analytical, mathematical agenda.

I hope you found this helpful. As an exercise, why don’t you go ahead and try placing a limit-order for your very next transaction?