What is a Limit Order?
Limit orders allow you to set a price at which you want to buy or sell a stock. Unlike market orders, your purchase or sale will go though only when the price reaches the level that you specify.
Limit Order Example
For example, you want to buy ABC Inc. at $50. The stock is currently trading at $51, so you set a limit order to buy at $50. The price may go up or it may go down, but you know that as soon the stock trades at $50, your order will be triggered and you'll buy at your predetermined price.
Once you buy ABC at $50, let's say you decide you want to sell at $53. Again, you place your limit order and wait. Once ABC trades at $53, your order becomes active and will sell at your target price of $53.
Limit orders are especially useful in volatile market environments. If a $50 stock trades between $50 and $60 on a volatile day, investors using market orders will be at a decided disadvantage because they won't have control over the price at which they buy or sell.
Why do Limit Orders matter?
By using limit orders, you can protect yourself from buying a stock at too high a price or selling at too low a price.
Note that if the price of the stock never reaches your limit price, your trade won't be executed. Also check your broker's fee schedule; some brokers charge more to execute a limit order than they do for a market order.
