Limit orders are a variety of order for obtaining shares in the stock market place. Under this order, the investor indicates or keys in his preferred price tag limit beyond which he will not purchase or sell. This stipulation permits investors to monitor the prices. Let us talk about in detail the mechanics of limit order and how investors can advantage from the very same.
Mechanics behind limit order
A limit order is the usage of a predetermined price tag to purchase or sell a share. Unless each price tag and quantity situations set by the investor are met, the order can not be executed. For instance, if ABC share is at present trading at Rs 200 but you are only prepared to spend Rs 192 you can enter a limit order at Rs 192. Your order will be executed only if the price tag falls to Rs 192 or under.
As the order can not be executed promptly, it remains in the order book and valid till the finish of the trading session, if not executed. Many broking homes permit limit orders to be placed even on holidays and in the course of non-market place hours also.
When to location limit order?
A limit order really should be placed by the investor when the market place is volatile and the investor expects the price tag to come down from the day’s higher. Often, one can location the order at a level perceived to be great from a basic and technical point of view. Further, a limit order may perhaps be valuable if an investor does not watch a stock on a continuous basis and has arrived at a specific price tag at which he will be glad to purchase or sell.
Shortcomings of limit order
It is crucial to note that when putting a limit order it is feasible to get handle on the price tag of a share and investors can capitalise on brief-term market place fluctuations in their favour. But there is no assurance that investors are capable to attain the quantity of stock which they want. In other words, if the preferred price tag does not attain till the finish of the trading session, then the order is not executed and the investor may drop an investment chance.
Market order vs limit order
Market orders are transactions that are intended to be executed at the present and ongoing market place price tag at the earliest feasible. The price tag of the share is secondary but the speed at which the trade to be executed is key. So, a market place order bargains with executing the order. But, a limit order sets the price tag at which one is prepared to purchase or sell. Limit orders deal mostly with the price tag and if the price tag ranges outdoors the parameters set in the limit order, then the trade will not take location. The big threat of utilizing a market place order more than the limit order is that investors have no handle more than the price tag. During a volatile market place, if a share’s price tag all of a sudden moves just ahead of you location a market place order then you finish up paying more or getting considerably much less than you anticipated.
To conclude, if finishing a trade and finding the shares credited into your demat account is crucial for you, then a market place order is the excellent one. But if obtaining a share at a precise price tag is a deciding issue, then a limit order is the great one.
The writer is a professor of finance & accounting, IIM Tiruchirappalli