Hey it's Sasha Evdakov and welcome to Tradersfly.com where I share with you some insight and educational material about the stock market and investing. In this week's video what I'd like to share with you is the Pros and Cons of a Limit Order.
Now we did already covered the pros and cons of a market order and if you want to go take a look at that video you can do so by clicking the thumbnail right here now before we even get into the pros and cons of the limit order. First off what is a limit order?
A limit order is basically a price you're looking to specify where you're looking to either get in or get out of the stock so as an example let's just say you're looking to get into McDonalds and the stock currently trades above $20 but you want to purchase it at $20. So what you can do is specify a limit order that you're willing to purchase that stock at $20 by simply putting in that limit order at the appropriate price that you want to purchase it at that $20 and then wait and have that order open until that stock comes down to that price level.
Unfortunately you may have to wait a long time for McDonald's to hit $20 or multiple years it could be multiple month but it may take some time but the beauty behind this is you don't have to set such a huge steep lowball figure to purchase your stock you could go ahead and nibble a little bit under the current trading price that way you get a little bit off the top of what is currently trading.
That way you're not forced into a position paying what the sellers are looking to get for the price of McDonald's. Now the beauty behind this is that you don't really distinguish the difference in one set of shares or a lot of shares in McDonald's then from another lot of shares in McDonald's
If you apply this concept to the real estate market it's a lot different because one house even though they may be exactly the same from one location to another the location is different because you can't put the same house on the same type of property or on the same piece of property so that really already distinguishes the house they might be facing a different direction and therefore the function way maybe slightly off and the value now is different.
However when it comes to trading shares or talking about shares of McDonald's instead of a hundred shares of McDonald's at one price and the share of a hundred shares of McDonald's at the same price from a different seller is exactly the same so to you it really doesn't matter whether you get the first set of shares or the second set of shares what's important to you is the price that you're purchasing because you're looking for appreciation in that company in the future.
When it comes to limit orders it allows you to really specify the price you're looking to purchase that stock at so if the stock is trading at fifty dollars a share and you're looking to get it for 49.72 you can go ahead and place that limit order if that stock keeps it just a little bit then you can go ahead and purchase those shares your order is going to be executed so long as the availability is there and you get it at the price that you want to pay.
Now the one major downfall behind this is that if the stock is taking off it's becoming a rocket ship it's exploding and the growth is moving to the upside then you may miss out on your trade then you may need to adjust your limit price you may have to move it up in order to get into the stock.
For example if your order hasn't been filled in a few days or a few weeks or a few months then you may have to bump up your limit price until you get filled. You can even set a limit that’s slightly higher than the current price.
Let's say you're in a fast-moving market and stock prices are just continuing to explode to the upside or even the downside let's just say they're exploding to the upside and markets are moving quickly. Which you could do is rather than placing a market order you could still place a limit order that's maybe a few pennies higher. So if McDonald’s is let's say trading get $50 and you want to get into the stock and you're in a fast-moving market where prices shift in prices are very volatile which you could do is put in a limit order at $51 so that way you're not overpaying by multiple dollar.
That way that price doesn't jump to $53 and you're paying more than that but this still ensure that you're getting into the stock, you're getting into the stock early and time sensitivity is still important meaning you're getting into the stock as quick as possible however you're not getting overcharged and paying market prices because remember even if you go to a fancy restaurant and you see on the menu that this fish is based on market price that doesn't mean it's going to be $20 like the other restaurant or $15 or $35.
That market price could be really any price they so choose to set it at it could be a hundred dollars $500 for that piece of fish for that piece of meat or whatever they want to charge. So if you really need it something if you really needed those shares then paying market prices is totally fine if you didn't really care so much about the price sensitivity it's more about the time and really getting in.
However if you care about the price if you care about getting a good execution placing a limit order is still in your better interest. So to really summarize the limit orders in the pros and cons as remember that limit orders you get to specify a price that you want to pay this can be really bad in a stock that trades a low liquidity because if you're looking to get into a stock you may not get filled.
If your time sensitive market orders are probably better. However if you’re more price-sensitive and you're looking to really pay a specific price or you don't want to overpay you should more than likely use limit orders and that's what I highly recommend for most people is to place a limit order most of the time even if you place a limit order just slightly higher above the current trading price.
This just make sure that you’re not overpaying for that stock price. on the flip side if you want to get into the stock you need to get in it really fast and it's a fast moving market it's very liquid there's a lot of shares traded. The market order should be just fine. If you’re wanting to protect your orders you don't want to get put into a trade and pay exuberant prices that's where sometimes you get to see those crazy wild spikes because somebody had a market order.
They needed to get in or out of the stock very quickly and somebody else was willing to sell at much higher prices however the market at the time was not very liquid and therefore the person purchasing those shares paid exuberant prices. So stick to limit orders unless you really need to get into that stock very quickly and it's moving and there's a very liquid market. Thanks for joining me if you enjoyed this video you want to see more videos like this one click this link and you can go to Tradersfly.com.
I'm Sasha Evdakov and remember to do what you love, contribute to others, but most importantly live life abundantly.
I'll see you next time.