In this segment of "Financial Planning Q&A" on Motley Fool Live, recorded on Dec. 1, Fool contributor Dan Caplinger shares some tips about making limit orders.
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Dan Caplinger: Limit orders right now for Everlasting: Firecrackers, what would you recommend as a strategy? Should I do 10 percent off the current price? Some sophisticated calculation? Love you guys.
I took this question not because I want to talk about Firecrackers in particular, which is a different service that not all of the people looking at us right now are talking about. But rather as a way, because limit orders are important for anyone who invests. Either they want to make sure they don't pay too much for a stock or they only want to buy a stock if it drops to a certain price.
The way limit orders work in general is, if the stock is at $75 right now and you'd be interested on it, but you want a bargain. You can set a limit order price for $70, and in that case, depending on how you set it up with your broker, if the stock hits $70, then your order would execute and you would buy stock.
But if the stock stays at 75, that order just stays there and nothing happens to it. If the stock goes up to 80, your order just stays there and nothing happens to it. Where you set that limit order depends on when you want it to execute.
But probably the bigger use for limit orders is especially when you have stocks that don't have high trading volume. It may be smart to set a limit order even at the current market price just to make sure that your buy order doesn't move the market.
I've seen situations where, in that same $75 example, if you put an order for 1,000 shares of some thinly traded stock, you do that as a market order. The last price was 75. You might get surprised, you might end up having to pay 78 or 80 or 85 for that stock. Just because 1,000 shares is more than that particularly thinly traded stock deals with. That's where limit orders can help and it's definitely something to pay attention to.