When you are making a trade, the brokerage will always give you lots of options. One of those options is the order type. You can place your order at the market price, set a “limit” price, or set a stop price. For today, we will focus only on the limit orders. Any time you make a trade, the default is a market price. If you know there is a particular price you want to buy or sell stock at, you can set a “limit” price on your order type.
A “limit” order sets a specific price threshold that a stock will be bought or sold at. When you set a limit order to buy, the purchase will happen automatically when the price drops below the threshold you establish. When you set a limit order to sell, the sale will happen automatically when the price reaches or goes above the threshold you establish.
For an example, last week I sold RAD. If after I bought it, I decided that $2.20 would be a good price to sell at, so I could set up a limit order at that mark. As soon as the price reached $2.20, the brokerage would automatically execute the trade on my behalf. If the price never got to $2.20, the sale would not happen and I would still own the stock.
It works the same way in a buy order, too. If you want to buy ROKU but you think $41.50 isn’t a good price, you can set a limit buy order. For this example, you could set a limit order of $40.00. If the stock price never gets to that level, the automatic buy will not happen.
Limit orders can be very useful. They can make the trades for you when the price you want is reached. They can also protect you from big fluctuations. Some traders only place limit orders. That way if they see a stock trading for $5 and they think it’s a good deal, they can set a limit order to buy. If the stock lurched upward to $6 as the trader was clicking BUY on a market order the sale would go through for $6.