Topic: How To Invest

Investor Toolkit: How to make market orders and limit orders work for you

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Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on investing money. Each Investor Toolkit update gives you a fundamental piece of investment strategy, and shows you how you can put it into practice right away.

Tip of the week: “Our advice on 2 ways of investing money in the stock market”

Most investors place two types of orders when buying stocks: “market orders” or “limit orders.”

  1. Market orders: A market order is an order to buy or sell a specific number of shares at the best price available when you place your order. Market orders are almost always filled within a very short period of time — minutes, if not seconds. However, you only learn the price you paid (for a purchase) or received (for a sale) after the order is filled. The market price may change, for or against you, between the time you place the order and when it is filled.
  2. Limit orders: With a limit order, you specify the highest price you are willing to pay when investing money in a stock. The main risk here is that your order will go unfilled if there is no stock available at or below your price. This introduces a filtering mechanism that can cost you money, especially if you set your limit below the current market price.

    However, an unfilled order is much more likely with your best choices, since they are far more likely to shoot up faster than you guessed. But you’ll always get a fill on your worst choices; they’ll come down to meet your price, then go lower.

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Investing money: Let trading volumes help you decide between market and limit orders

In general, most investors should use market orders when buying or selling widely traded shares. That’s because the market-order risk of occasionally paying too much is more than offset by the limit-order risk of missing out on your best ideas.

When investing money in thin-trading shares, you may want to put a limit on the price you are willing to pay if you are buying (or the price you are willing to accept if you are selling). If so, set your limit on buy orders above the price of recent trades. It’s better to pay a little more or receive a little less than to miss out entirely on your best ideas.

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Comments

  • Very instructive commentary on market and limit orders. I invest online and use market orders 99% of the time…your article confirmed the benefit of giving the trade a little flexibility to get the stock you want.

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