Limit Order

What It Is:

Limit orders allow you to set a price at which you want to buy or sell a stock. Unlike market orders, your purchase or sale will go though only when the price reaches the level that you specify.

How It Works/Example:

For example, you want to buy ABC Inc. at $50. The stock is currently trading at $51, so you set a limit order to buy at $50.  The price may go up or it may go down, but you know that as soon the stock trades at $50, your order will be triggered and you'll buy at your predetermined price.

Once you buy ABC at $50, let's say you decide you want to sell at $53. Again, you place your limit order and wait. Once ABC trades at $53, your order becomes active and will sell at your target price of $53.

Limit orders are especially useful in volatile market environments. If a $50 stock trades between $50 and $60 on a volatile day, investors using market orders will be at a decided disadvantage because they won't have control over the price at which they buy or sell.

Why It Matters:

By using limit orders, you can protect yourself from buying a stock at too high a price or selling at too low a price.

Note that if the price of the stock never reaches your limit price, your trade won't be executed.  Also check your broker's fee schedule; some brokers charge more to execute a limit order than they do for a market order.