IN LIFE AS in markets, we enjoy far less control than we’d like to imagine. There’s a trading technique that many investors like to use because it gives them a comforting illusion of control — the limit order. It’s almost always a mistake. As I’ve written before, it’s not what you buy, but how you buy. Whether it’s Palm (PALM) or pork bellies, placing the right kind of order with your broker is critical for success. And while it’s tempting to use limit orders to save some pennies, good traders know they can be a pound-foolish way to trade, and use market orders instead.
Let’s review some terms. A market order is an order that is immediately executed at the best available price. So if XYZ is bid at 50 and offered at 50 1/8, a market order given to your broker will have you buying the stock in a matter of seconds, most likely somewhere near the asked price of 50 1/8.
A limit order is an order to execute a trade at a specific price or better. So if XYZ is bid at 50 and you enter a limit order to buy at 48, you won’t buy the stock unless XYZ trades at least two points lower. (more…)