It is important for investors to learn how to properly use limit orders in their trading strategy. A buy limit order is an order placed with your broker to purchase a specific number of shares of stock at or below a preset price, referred to as the limit price.
When you set your limit price, you are telling your broker the maximum amount per share you are willing to pay. Buy limit orders can be useful tools in mitigating risk, and realizing greater profits from your investment strategy.
While there are many benefits to using a buy limit order, there are some potential drawbacks to using these types of orders, and they may not be suitable for every security or investment scheme. It is crucial to carefully weigh the benefits and drawbacks prior to implementing buy stop orders in your trading strategy.
Using A Buy Stop Order Effectively
With a buy stop order shares of a security are only purchased if the per-share price reaches or falls below the limit price. If you have found a security that is trading at $10, and your research indicates that it is overpriced, you may set your buy limit order for 100 shares at $9.
Your order to purchase the security will only be executed if the share price falls to $9 or less, providing investors with a distinct advantage over placing a market order. With a market order, shares are purchased at the market price, which means that you can not be guaranteed a set per-share price.
Buy stop orders can be an effective tools for averaging down in investing. When you average down, you are utilizing a means of decreasing your average cost per-share, thereby decreasing the amount a security would have to rise in order for a profit to be realized.
Advantages And Disadvantages To Using A Buy Limit Order
When acquiring securities for your investment portfolio, a buy stop order is considered to be the safest approach. If a stock does not reach your preset purchase price, then the order will not be executed. This automation of the trading process assists you in maintaining your trading strategy, and frees you from having to constantly monitor a stock’s price fluctuations.
A buy limit order will continue to be in effect until either the order is placed, or is canceled by the investor. Many people choose to cancel their buy stop orders when the order fails to be filled within what they consider to be a reasonable amount of time.
A potential drawback to using a buy stop order is that an order may be triggered inadvertently by volatile market swings, and it is advised to carefully consider securities that exhibit high intra-day volatility. There is the possibility that after hours trading could cause a security to fluctuate in price causing the order to remain unfilled.
For many investors, the benefits of using a buy limit order outweigh the risks making these types of orders popular for investors.