In this video we're going to break down limit orders, I'll show you how
to actually place a limit order to buy or sell a stock, and we'll look at some of the
pros and cons of using this order type. So what is a limit order? A limit order
is an order type that lets you set a limit on how much you are willing to buy or sell
a stock for. With a limit order, you're letting your brokerage know the maximum price that you
are willing to pay to buy a stock, or the minimum price that you are willing to sell a stock for.
Let's go ahead and look at some examples of buying and selling with limit orders.
First let's look at buying. So let's say that we have a stock trading at $10 and you put in
a limit order for $9.50 - meaning $9.50 is the maximum amount that you are willing to pay.
The trade won't execute until it goes to or below the price that you specify.
You could also set it higher than the current price. So with this scenario, you could set your
limit at $10.50. That means that it's going to try to execute your trade at $10.50 or better.
So in this case since the stock is at $10, it will likely fill somewhere between $10 and $10.50.
Now let's look at selling with a limit order. When you're selling, the price that you enter
means that you want to sell it at that price or higher. So let's say that we get a stock for $10.
Now we put in a limit sell of $12. That means that when the stock price hits $12
or better, the trade will execute and the shares will be sold. With a limit order, the purchase
or sale will not actually go through until that price hits the price that you specified or better.
In other words, that trade is not guaranteed to go through. That stock never actually has to hit
the price that you entered - it may go completely the opposite direction. So when you place a limit
order during market hours, if your account says that your position is open and not filled, that is
because the trade has not actually gone through. That price that you entered has not yet been met,
and that trade will not go through unless that stock price actually hits that price that you
entered or better. Let's go ahead and open up an investing app to see what it looks like when
we actually buy or sell using a limit order. Alright so we're going to go ahead and open up
Robinhood for this example. I'll start with a practice buy order, and for this example
I'm going to use Pinterest. So what you would do if you were looking for a stock is to click
on that magnifying glass in the bottom middle of the screen. I already had this up,
so we're just going to go ahead and click trade. And from here we're going to click buy. Now your
screen may look a little bit different depending on what you did last or if you've never opened it.
So to make sure that we are using a limit order, we are going to click on whatever is in the top
right of your screen with that little down arrow. Mine says dollars yours may say something else.
We're going to click on this and under conditional orders, we're going to select that limit order. So
on my screen that's the second option. Now it asks us to enter a limit price. And it says below "the
maximum price that you'll buy this stock for". If you're not sure what the stock is currently
trading at or if you want to see the bid and the ask prices, you can click on that little question
mark that's right by the market price, and that will just give you some additional information. So
you can see that as of when I'm recording this, the price of Pinterest is currently at $72.20
so I'm going to enter a limit price of $70. For trading hours I'm going to just make this during
market hours, and for time in force I'm just going to set it for market close today - meaning
that if it doesn't fill at $70 by the end of the trading day, then that order will be cancelled.
If you want that order to stay open for longer, then you can select that other option. Now it's
going to ask us how many shares we want to buy at that limit price. When you enter a number,
you'll see that estimated cost will update at the bottom, so I'm just going to keep this at 1.
I'll click review, and then we swipe up to submit the order, and now we see that our
order is placed. It's important to note that a placed order is not the same as a filled order.
If your order just says placed or some apps may just say open, that means that the order has
not filled yet. So we're going to go back to that screen with our stock on it. We're going to scroll
down a little bit to upcoming activity. And you can see that that order that we just placed still
says placed - it has not yet been filled. And as long as the order has not filled yet,
you still have an opportunity to cancel that order if you change your mind. So to do that we're just
going to click on that cancel order button in the bottom middle of the screen, and once we do
that you can see that the order status updates to cancelled. So that means that that order is
no longer active, and it will not go through. Now let's look at an example for selling. So I'm
just going to sell off a random free stock that I got from Robinhood. If you want a free stock,
you can use the link in the description when you sign up for Robinhood and you will get that. So
we're just going to select one of those random free stocks, I'll click on trade, and this time
we are going to click sell. Again you're going to want to make sure that you are on the correct
order type - so we're going to click on that option in the top right corner to access all of
the different order types, and under conditional orders again we're going to select limit order.
So for selling, you'll see that this now asks you to enter the limit price or the minimum price that
you'll sell this stock for. Again it shows you the current market price, you can click on that if you
want more information, and remember you can set the limit price a little above, a little below,
right at the market price, wherever you want - but that order isn't going to fill
unless it meets your price or better. So for this I'm going to set it just slightly higher at $4.44,
again keeping it at market hours, and keeping it at market close, and now just like when we
were buying it's going to ask us for the number of shares that we are trying to sell at that $4.44.
When you enter those shares it is of course going to update that estimated credit or
that estimated amount at the bottom. If you're okay with whatever that is, then you click review,
you swipe up to submit the order. So you'll see that on this order placed screen it says 0 of 1
shares sold, which means that this order hasn't gone through yet either. So once that price hits
$4.44 or better, the order should go through, or again if you'd like to cancel before that
order goes through, you can still do that. There are definitely both pros and cons to
using limit orders. The pros are that you get to set your exact price which means that there
won't be price surprises - you know that limit that you set. Some of the cons are that your
trade is not guaranteed to go through, and because of that if you are trading
in fast moving or volatile markets, that could mean potentially missing out on some trades.
Those are the basics of how a limit order works, but before you place a
trade you should also know how a market order works. If you want to learn more about market
orders click on the video that's up on the screen and I will see you guys over there.