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Most new investors place market orders which essentially authorize their broker to buy or sell a given security as soon as possible at the best available price. Their use of a market order instead of a limit order can result in paying more for a share than they expect or selling shares for less than they expect.
The same investor could potentially save several cents a share by placing a limit order. Limit orders can be used both to buy and sell shares and work by instructing the broker to buy a specified quantity of a security at or below a specified price, or to sell it at or above a specified price (called the limit price). Over time these small amounts can have a major impact on the returns individual investors receive.
With a limit order you do run the risk that the desired price will not be reached and as such the shares will not be purchased or sold. So the major consideration when deciding between a market order and a limit order is which is the priority - getting the shares or getting the desired price?
Limit orders are also a great way to hunt for deals on stocks you like but think are overvalued. This is accomplished by placing a “limit” lower than the price at which the security is currently trading at which point you wish to buy it. If it reaches that limit, you buy the stock. If not, your order expires unfilled.
When placing a buy or sell limit order with your broker, it is important to specify if the order is a day order (for today only), or a GTC order (Good Till Canceled). Investors also need to consider the additional cost of placing a limit order as some brokers charge higher fees for limit orders.