Pros and cons of day orders
Day orders can streamline trades when the investor has specific pricing requirements. Let's say a value investor has decided to buy Company A at a buy price no higher than $100. At this price point, the asset satisfies the investor's margin of safety threshold.
If Company A stock is trading just above $100, our value investor has two options. One is to submit a day limit order to buy Company A stock for $100 or less. The second is to monitor the intraday movements of Company A stock, waiting for the price to drop. The second approach is more tedious and does not guarantee success. For example, the price could dip and then rise before the investor can submit the trade order.
Unfortunately, day orders can lead to unintended outcomes. If Company A makes a surprise announcement on the same day about, say, losing a major contract, the stock price will fall. Given the contract news, the investor may no longer be willing to pay $100 per share. But it's likely that the order will be filled before the investor can cancel it.
To avoid this scenario, investors should not set and forget their day orders. A lot can happen within one trading session, and monitoring is essential for risk management.
Day order alternatives
Investors can put other timing instructions on limit orders. While the timing options will vary by broker, three common alternatives to the day order are good til canceled (GTC), day plus extended hours, and GTC plus extended hours.
- GTC orders remain active during regular trading hours for a period that is defined by the broker. GTC orders with Schwab, for example, will expire in 180 calendar days unless the trade is executed or the order is canceled by the investor. Fidelity defaults to a 180-day expiration for GTC orders but also allows the investor to set an earlier expiration date.
- Day plus extended hours orders remain open for one day, including premarket and after-hours trading.
- GTC plus extended hours orders stay active for the longer GTC period and can be triggered in premarket or after-hours trading.
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