Friday, March 16, 2007

Limit vs. Market Orders

This question was asked recently on the www.moneysense.ca forum whether it’s better to use limit orders or market orders. Personally, I always use limit orders. I usually put them in for a 5 day period but will occasionally adjust them (depending on the market). Using limits has caused me to miss some opportunities in the past (sometimes within a penny of my strike price) but it has also allowed me to buy some good companies 3% to 5% lower than a market order would have. I am a long term investor so the 5% initial savings will add up over the long term and will hopefully make up for any missed opportunities. Although, there’s no problem with market orders I would definitely advise that investors who purchase low volume stocks use limit orders in order to avoid any spikes caused by liquidity issues.

8 comments:

advantage said...

If you watch the market reguluarly like I do, I like market orders better because they are cheaper, and you can get a better feel for what is going on.

If you are trading a lighly traded stock then Limit is the way to go.

Bottom line, is that if you have already determined the stock is cheap, and you are a long term investor, it doesn't really matter.

Canadian Money said...

I have used limit orders many times. On occassion they can be very profitable. If a penny stock is going crazy and I'm ready to get out with a profit, I have placed a limit order as high as possible and sometimes lucked out. On occassion I have been one of the guys who sold out close to an an extreme peak, or bought shares close to an extreme momentary bottom.

Middle Class Millionaire said...

advantage - if you don't mind me asking who are you trading with? because limit and market orders are the same price for me in both my big bank trading account and with Questrade.

good point canadian money. I didn't mention that in my original post but I put in limits to sell also. I'll put them in for 2 or 3 days so I'll be able to sell regardless of how busy I am at work.

advantage said...

BMO InvestorLine

Market Orders - $25
Limit Orders - $29

Canadian Money said...

Another thought:

I have also used limit orders as a trailing stop loss/profit protector. In a fast moving stock moving the limit sell order up as the price moves up, with a little wiggle room, assures me of being taken out when the big plunge starts. I never know when it will happen but it always does. This is nice to have in place when work gets busy.

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QUALITY STOCKS UNDER 5 DOLLARS said...

ETF'S work much better for limit orders than a single stock.