Why I Always Use a Limit Order

When buying stocks, there are two main type of orders: Market Orders and Limit Orders. Let's discuss what these are and which is best for most investors.

Market Orders

Market orders are the simplest kind. You're buying at whatever the current price is. You're agnostic to it and just want your stocks! Given the limited restrictions, these orders offer the greatest likelihood of fulfillment....but this comes at a cost.

Given the lack of limits, you could end up paying much more than expected. Markets are volatile, prices can sharply shoot up out of nowhere. Passively accepting the market price opens you up to the risk going into margin (negative balance), leading you to owe money and face interest charges.

Limit Orders

Limit orders, as the name implies, places a limit on the price you're willing to pay. Your order will only be filled if it's within your limits. This provides more certainty. Whichever way the markets moves, it's guaranteed that you won't pay more than your limit, allowing you to size your order appropriately.

Best of Both Worlds

A great way to combine the fillability of Market Orders with the assurance of Limit Orders is to do what is called a Marketable Limit Order. These are limit orders that are expected to be filled immediately due to how they are placed.

How to do a Marketable Limit Order:

When Buying - Set your limit price at 2 cents above the current ask price (the price sellers are asking for).

When Selling - Set your limit price at 2 cents below the current bid price (the price buyers are bidding with).

Because you are placing your order a bit above the asking price (or a bit lower the bid price when selling) you can expect your order to fill immediately as the few cents difference acts as a buffer for market movements. This is how I buy all my ETFs and it always leads to a speedy and safe order.

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