What Are Limit Orders? And Why You Should Definitely Use Them to Trade Stocks


Getting the best returns on your investments involves so much more than just buying and selling stocks at the right moment. Maximizing portfolio returns also demands closer attention to how you’re trading investments, such as getting the lowest possible price when purchasing stocks and selling while prices are still high.

You can never fully predict which way the market might swing for your favorite industries and investments, but you can minimize your risk and maximize gains with limit orders. This unique trading strategy involves price limits on both the buying and selling ends of the investment spectrum. As a stock buyer, you want to get the lowest price possible per-share; on the selling side, you’ll be able to set price floors on the minimum amount you’re willing to sell for.

Limit orders are useful for short-term trading and long-term investment strategies alike, though limit orders tend to be more popular among day traders who want their portfolios to perform as efficiently as possible. Whether you’re new to investing or simply haven’t considered limit orders as a part of your investment approach yet, continue reading to learn more about the ins and outs of limit orders.

Buy Limit Orders

A buy limit order sets a maximum price you’re willing to pay for a stock and automatically executes the trade if/when the stock falls to that price. You’re not guaranteed to get the price you want, but you also won’t lose money by purchasing higher-priced stocks because the trade just won’t happen until either the limit order expires or the stock finally reaches that price point.

For example, if you want to buy 10 shares of Best Buy stock at $60.00 per share, then your broker or robo-advisor will not initiate the trade until the stock reaches the maximum price you’re willing to pay. So if Best Buy’s stock price is currently $80 and goes up in value, then your trade won’t happen.

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Sell Limit Orders

Limit orders also apply to the process of selling stocks as well. This is particularly useful for protecting your portfolio by setting minimum prices you’re willing to sell each share of stock for. As with buy limit orders, the trade isn’t guaranteed to happen if the minimum price you set is never met.

Another advantage to limit orders when it comes to selling stocks is that you can set a “stop loss order” to automatically offload your stocks whenever share prices dip below a certain level. Setting a stop loss order prevents you from losing too much money on a particular stock if prices are plummeting and you aren’t available 24/7 (or at least every minute of market trading hours) to initiate the sale yourself.

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Quantities and Duration of Orders

If you want to place limit orders on certain investments in your portfolio, then it’s important to set up conditions and specific durations for those limit orders. On one hand, you could limit the number of stocks you buy/sell when prices reach your desired expectations. On the other hand, you could initiate an “all or none order,” which executes the trade of stocks all at the same time (as opposed to spacing out your trades to wait and watch market activity before going through with the remainder of your purchase/sale order or canceling the trade altogether).

When it comes to the timing of limit orders, you can either set up specific durations or a “good till canceled” (GTC) order, which means your criteria for buying/selling stocks remains in place until you manually cancel the limit order. In many cases, limit orders are set up for one trading day (and cancel when the market closes for the evening), though limit orders set for foreign exchange markets can be filled throughout the day and night as they’re traded outside of the usual market hours in the U.S.

Limit orders are ideal for short-term trading strategies, but they’re also useful for anyone who wants greater success in the stock market. Buy limit orders help you get the best share price possible on a particular stock, while sell limit orders help you increase your chances of getting higher returns on your investments with minimal damage from plunging stock prices (as long as you have a stop loss in place).

Although the orders may seem confusing for newer investors, it’s ultimately a great strategy for maximizing your returns and minimizing your losses no matter how big or small your current portfolio is.

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