Let’s say you found your perfect investment. You are absolutely sure this stock or currency pair is going to skyrocket and do wonders for your portfolio. There is just one problem – it’s currently overpriced and you want to buy it when it’s cheaper. Or pretend that you are ready to sell one of your investments, but only if the price reaches your target. Is there a way to control purchase and sale price? Absolutely – using limit orders allows you to do just that.
What is a Limit Order?
A limit order allows you to buy or sell an investment instrument at a specified price. When you place a buy limit order, you tell your broker to only buy at or below the specified limit price. Similarly, a sell limit order ensures you sell your investment at or higher than the specified limit price. Limit orders come with a guarantee that you will buy or sell at the price you want, or the trade won’t be executed at all. Let’s look at a couple of examples when using limit orders can be especially helpful.
Suppose Mike wants to buy EURUSD. He decides that he is willing to pay at FX rate 1.0500 for this investment. The pair is currently trading at 1.0773. If Mike places a regular market order, he will end up overpaying. Instead, he places a buy limit order to purchase 1 lot of EURUSD with a limit price of 1.0500. He knows that when the order is executed, he will pay 105,000 USD to get 100,000 Euro.
Susan’s stock ABC has been a great holding, but she believes it’s near the top. It is currently trading at $128 a share, $2 short of her target sale price of $130. Susan doesn’t have the time to constantly watch her investment and doesn’t want to miss the opportunity of selling her fund at its peak. She sets up a limit order to sell all of her shares of ABC at $130. Five days later, while Susan is enjoying afternoon tea, her fund hits an intraday high and her order is processed.
Let the Limit Order Do It’s Thing
When placing a limit order, it’s a good idea to specify a good ’till canceled (GTC) duration. This means that the order will remain open until it is executed, or until you manually cancel it. A GTC limit order can greatly simplify the buying and selling process – you just find an appropriate investment, set a target purchase or sale price, place a limit order and forget about it. It may take some time for the trade to execute, but you can sleep at night knowing that that purchase or sale price is guaranteed.
Compare this with market orders, which are executed at the current trading price. Getting the price you want would require you to constantly watch the market fluctuations and time the placement or your order accordingly. This is obviously a huge inconvenience that can be easily avoided by using limit orders.
Using Limit Orders Can Reduce Stress
Investing in the stock or FX market can be very stressful. By using limit orders you can relax while the prices of stocks and Forex rates go up and down. Since you are guaranteed the purchase or sale price, you may feel less anxious and stressed about your order.