Syndicate
Limit orders
A limit order is an instruction to buy or sell at a specific price. The specified price could vary in relation to the market. A limit order specifies the minimum and maximum buying and selling stock price.
If you foresee a drop in a stock current price, for example, you can allocate a limit order to buy such stock at the minimum specified price. If you wish to buy 100 stocks from General Electric, for example, has fluctuated between $28 and $34 per stock you can allocate a limit order to buy said stocks at $28 even if the price at the time of the allocation is $34. The length of time this order is effective before being carried out depends on the instructions given to the agent.
Using a good-till-cancelled (GTC) order can keep its order active until is carried out or cancelled. If a time limit is not specified it is assumed it is a day order. In that case, if the price of the stock does not decrease to the specified limit the order is cancelled at the end of the day. Equally, a limit order to sell stocks can be allocated specifying a higher selling price than the current market price. If an IBM stock, for instance, is being negotiated at $87 per stock and you think that its market price will continue to increase you may decide to allocate a limit order to sell at $89 minimum per stock. This order will be carried out only if it reaches that price.
A limit order for an NYSE stock is sent from the investors brokerage firm to the floor agent registered in the market who will try to carry it out among others commission brokers.
A commission broker is an employee of a brokerage firm which is a member of the market, and who carries out the firms transaction orders in the negotiation floor. If limit orders prices do not fill in bid and ask current market prices, the order is given to a specialist (member of the market that makes business with one or more stocks listed in that market). If the specialist does not carry out the order, the limit order is included within the specialist’s site for a future negotiation. In that case the specialist is acting as an agent to the commission broker.
If IBM stock prices, for example, would raise days or months later, the limit orders in his specialist’s site, with a higher specified price are carried out in the order they where registered, action known as “the first-in, first out “(FIFO). The specialist receives part of the clients commission for carrying out the limit order.
The advantage in allocating a limit order is that the investor has the opportunity of buying or selling stocks at lower or higher prices than those in the market. The obvious disadvantages are that the limit orders could never be carried out if the specified limit price is not reached. Allocating a limit order does not guarantee it will be negotiated, however, with a market order you could be sure of its negotiation, but not about the buying price.