(2-min read) If you use a limit buy (or buy-limit) you put in an order to buy a company share, but only if you can get it for $x or less. You can also use a limit sell, specifying a price that you won’t go below.
If, instead, you were to use an ordinary market order to buy a share, you might pay a bit more — or potentially a lot more if the share price zoomed up before the transaction took place.
A limit buy would work particularly well if you wanted to buy an infrequently traded share, where it’s hard to predict what price you might otherwise pay.
However, you’d be wise to keep an eye on your limit buys, which last for 30 days unless you cancel them. During that time, a company might announce some bad news, and the share price falls. You would end up paying your price on the way down, where otherwise you would probably have waited until the price settled.
Also, as you realise, if you set too low a price, you won’t get the shares. If you really want a certain share, you have to set the limit close to the current price or the purchase might not happen. That means that although you get a bargain, it’s not a big bargain.
But if you’re less fussed about what you buy, you could put in low limit buy orders for lots of shares and end up with the ones that got cheap enough.
Would that randomness matter? Perhaps not. I’ve written before about how monkeys have picked shares — or people have thrown darts at a newspaper share table and bought whatever they hit — and done better than people who spend hours agonising over what to buy.
So what’s my opinion? By all means use limit buys, as long as you’re watchful. Buying bargains is good — although I doubt if it will make all that much difference over the long haul. By the way, ASB, Hatch and perhaps other share brokers also offer limit buys and sells.
Source: Mary Holm
P.S. I research and interview economists, NZ investors and profitable companies to find tools & tactics that you can use to achieve financial freedom.