A Limit Order Buy is a very important tool for investors, allowing savvy investors to make smart buys. A limit order buy is also often called a buy limit order. So what is a buy limit order exactly? More or less, a limit order buy is an automated trading method that will automatically execute buy orders at or below a specified price.
Fact is, many investors, both pro and amateur, can’t monitor their portfolios all the time. For this reason, stock brokers offer a variety of tools to automate trading and that can execute trades when investors aren’t looking. These tools can be used both to buy and sell stocks. Often, brokers will charge extra commissions and fees for these trades, so make sure you check with your broker.
A buy limit order can be used to automatically conduct a trade once certain prices are achieved, and only while those prices are in effect. There are also many other types of automated trading methods. For example, you can set a stop loss order that will sell off stocks once a certain price is reached. This way, if stock prices drop to a certain point, a trade will automatically executed, thereby cutting your losses.
Answering “what is a limit order to buy”?
So specifically, what is a limit order to buy? A limit buy order is an order that will execute once a certain trade price has been reached, and only while prices are at that point or better. Still not making sense? Don’t worry, after we put it into an example, it will make more sense.
Let’s say Apple stocks are currently selling for $110 dollars. You’re a fan of Apple, think the company has a real future, but stock prices are currently over valued. If stock prices were to drop to $90 dollars, however, you’d love to pick up the stock for a long hold.
Let’s assume you’re also not able to monitor your stock portfolio closely. Maybe you’re going on vacation, or your personal life is distracting you. In this case, you can set a buy limit to automatically execute once stock prices drop to $90 dollars or less. If Apple stocks drop to $88 dollars, for example, your trade will be executed. A buy limit order is thus a great tool for automating trades.
You can also use what is called a stop order, which is very similar. Once the threshold is reached, your order becomes a market order. Since it’s a market order, even if prices quickly rise, your order will still be executed. So if Apple shares suddenly hit $90 dollars, but then immediately rise back to $100 dollars, your order will still be executed, and you’ll end up paying more than $90 dollars per stock.
The difference between a buy limit order and a stop may seem like a minor nuance, but is actually very important. Since stop orders are cheaper for brokers to execute, they are usually cheaper for investors, but risks are a bit higher. Keep that in mind.
What are the risks of a limit order?
There are some risks to automated trading methods, such as a limit order. Whenever you’re trading “blindly”, you are at risk of making bad trades. Let’s go back to the Apple stock example. When you put in the buy limit order, you’re basing your analysis on current conditions. Apple stocks right now, in the current market, would be a great buy at $90.
What if, however, another tech bubble were to pop and stock prices were to plummet? Or perhaps Apple is suddenly rocked by a major scandal. In these situations, you might not want to buy Apple stocks, at least not until you’re sure that stock prices have bottomed out.
Going back to our previous example, let’s assume that a tech bubble really has formed and just popped. Stock prices for tech companies, including Apple, are dropping quickly. Your $90 dollar threshold is reached and the trade is executed. You end up buying Apple shares at $88 dollars.
Only problem, there’s a tech bubble and markets deflating rapidly and aren’t showing signs of slowing down. Prices continue to drop, reaching $80 dollars, and then $70. If you were conducting trades yourself, you would have known not to buy because of overall market conditions. Because you used an automated buy limit order, however, the trades were automatically executed, leaving you stock with overpriced shares!
Just keep this in mind when you set up automated trading tools, like a limit order buy. It’s also a good idea to make sure you don’t become overly reliant on these tools. Over exposure to anything carries risks with it.