When the market drops sharply, you're generally better off licking your chops over sudden bargains than gnashing your teeth over temporary losses. As the market plunged on May 6, visions of purchase orders danced in my head -- but alas, I couldn't place a trade in time to profit before the market corrected itself. If I'd only set up limit orders on the stocks I wanted, I might have entered May 7 with more profits in my pocket.
A market order buys or sells stocks at the going price. But a limit order instructs your broker to buy or sell a given stock only at a set price or better. I've generally used market orders in my own investing, rather than wasting time or chances on limit orders. After all, if the stock never moves into the range I've specified, a limit order could keep me out of that investment altogether.
However, May 6 pointed out market orders' limitations. If I'd placed a market order to sell shares of Boston Beer
Many trades that happened during that problematic freefall period ended up canceled. But less extreme free falls do happen from time to time, making market orders a potential problem, especially for volatile stocks.
I'd think twice before placing a limit sell order on a stock I own. One volatile day could inadvertently boot me out of a strong company. However, limit buy orders can be handy.
Procter & Gamble
Only the most fleet-fingered and eagle-eyed souls could have bought shares during their quick plunge May 6. But if you'd had a limit order to buy P&G when it fell to, say, $50, you might have walked away with shares at a discount.
I've rounded up a few other stocks that moved sharply that day, each rated with four or a maximum five stars by our CAPS community of investors. With the right limit orders, you might have owned them:
(NYSE: ACN)enjoys steadily rising profit margins, a return on equity topping 50%, and consulting and outsourcing businesses that stand to benefit as our economy recovers.
(Nasdaq: HANS)has refreshed its profit margins since 2008, and it generates a return on equity greater than 35%. As Americans get more stressed-out and more sleep-deprived, energy drinks and other beverages purported to be healthier than plain soda pop should become even more appealing.
(Nasdaq: LINE)and its 10%-plus dividend yield might have made the watch lists of investors willing to stomach the tumultuous gas and oil markets.
Are there any stocks on your watch list for which you'd be willing to wait for a more attractive price? If so, a limit order can ensure that being busy, distracted, or simply unaware of a market drop won't keep you from capitalizing on an opportunity.
Longtime Fool contributor Selena Maranjian owns shares of Procter & Gamble. Accenture is a Motley Fool Inside Value pick. Hansen Natural is a Motley Fool Rule Breakers recommendation. The Fool owns shares of Procter & Gamble, which is a Motley Fool Income Investor recommendation. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.