There’s tremendous importance in identifying price targets as an investor. A price target is the price at which you’re willing to buy or sell a security, based on its value. However, security prices rise and fall all day, every day. It’s difficult to monitor the prices of multiple securities at any given time without a lot of manual effort. That’s why brokers offer the convenience of a buy limit order. 

A buy limit order is a special type of order that’s only executed when the price of a security reaches or falls below a designated price. It’s the simplest way for investors to ensure they’re purchasing a security at the right price point, without hovering over the buy button all day long. As soon as the stock reaches the price, the order gets triggered and the broker fills it.

Buy limit orders are a fundamental tool in every investor’s arsenal. Here’s a closer look at how to use them effectively and some of the important considerations that come with automating your purchase actions.

A Buy Limit Order Example

The simplest way to illustrate one of these orders is through an example. Say that you want to purchase shares of Roku (Nasdaq: ROKU). The stock trades for $165 right now, but you believe it’s slightly overvalued. You want to become a shareholder, but only if the price falls below $160. You place a buy limit order for 50 shares at $160 and go about your day with peace of mind. 

If, at any point during the trading period, the price of Roku hits $160 or falls below, your broker will execute the order for 60 shares at the current price below the threshold. In this case, let’s say that your broker exercises the trade at $159.88 ($9,592.80). However, if the price of Roku never makes it below $160 during the trading period, your buy limit order won’t kick in, even if the price falls to $160.01. 

Daily vs. “Good Till Canceled” Orders

Regular buy limit orders are daily orders, meaning they’ll expire at the end of a trading period if they’re not filled. However, there are also “good till canceled” (GTC) orders to consider. These orders will remain open until the stock price broaches the limit and they’re triggered. Often, GTC orders will cost more than a typical market order, since they remain open.  

Investors need to be cognizant of daily vs. GTC orders. Because daily orders expire, investors need to reset them daily or risk missing out on fast-moving price action. Likewise, failing to remember a GTC order could mean executing a buy the investor didn’t anticipate! 

The Benefits of Buy Limit Orders

As you can imagine, there are plenty of great benefits in using buy limit orders to automate your investing strategy. 

• You, the investor, control the price point that you purchase a stock at. The order represents the absolute highest price you’ll pay for a stock. That means you’re never paying more than you want to for shares. 
• Buy limit orders are automated by your broker, which means they’re a “set it and forget it” investing tool. Once you’ve specified the price and submitted the order, your broker will handle the rest. No need to monitor price action all day. 
• GTC orders can capitalize on price gapping. If, overnight, the price of a stock gaps down and opens significantly lower than the previous close, investors who buy limit orders will see their orders filled right away, before action has a chance to push the price back up. 

Buy limit orders are a handy tool in automating your investing function and can empower investors to purchase securities at prices that coincide with their investment thesis. 

The Drawbacks of Buy Limit Orders

Investors need to think hard about their objective price target when placing a buy limit order. There are some drawbacks that can accompany this type of order.

• Buy limit orders may come at a higher cost through some brokers, as opposed to general market orders. Many brokers also charge more for GTC orders, as opposed to daily orders. This is often a small price to pay for the cost of price protection. 
• An ill-place order can miss out on price appreciation if it’s too low. For instance, if your buy limit order is for $50 and the share price dips to $51, the order won’t trigger. If the price shoots up to $75, you’ve missed out on significant gains.
• Buy limit orders are first-come, first-serve. Brokers execute them so long as there are shares available. This works for and against investors. For example, an order for 1,000 shares at $50 might fill for $49.25; or, it might not fill at all if the price rises again. 

It’s a good idea to check on these limit orders occasionally, especially if they’re GTC. Sometimes, it’s smart to adjust or cancel them, depending on the current behavior of a stock price. 

A Simple Way to Automate Investing

Few retail investors have access to the powerful software and trading platforms of institutional investors. That said, buy limit orders offer a way to automate and empower any retail investment strategy. Identify a value price point for a stock, submit the order and sit back while your broker does the rest. The right thesis and a few careful limit orders can turn into lucrative holdings for an investor who’s long or traders looking to capitalize on a swing. 

The post What is a Buy Limit Order? appeared first on Investment U.

-----------------------------------------------------

By: Leanna Kelly
Title: What is a Buy Limit Order?
Sourced From: investmentu.com/buy-limit-order/
Published Date: Wed, 09 Feb 2022 20:00:10 +0000

Read More