This article answers the question; what is a limit order to sell, also referred to as a sell limit order.
There are many kinds of conditional orders for purchasing securities, as they are valuable investment strategies. Because of the variety of orders used for acquisition, this article focuses on what a limit order to sell is.
However, in order to best understand a limit to sell, this article will compare a few similar strategies. It is important to remember that choosing one strategy over another is based on the specifics of the investor and of the asset in question. Each kind of order is designed for a different application and kind of asset acquisition.
Investment and Asset Acquisition Strategies
In a nutshell, a limit order to sell places a limit on how much to sell a security or stock for. A limit order is used by either the buyer or seller depending on whether it is a sale or acquisition. The basic logic is both kinds of limits is as follows:
- the buyer does not want to buy Stock-A for more than x dollars or,
- the seller does not want to sell Stock-A for less than y dollars. (This is the kind of limit that this article focuses on).
A limit order to sell is a kind of conditional order. Limit orders are only filled if or when the specified conditions are met.
What You Need to Know
When the investor’s priority is over the sale price of one of her assets, she will use a limit order to sell. This investment strategy to acquire stocks or securities prioritizes a specific price over the actual sale or purchase of the stock.
There is no guarantee that the sale of a stock will go through with limit orders. The central feature of a sell limit is that a maximum purchase price required, or put another way, a minimum sale price is required. Instead, this strategy is to ensure that there is a set price for the sale of a stock or security. When the order is the purchase of a stock, it is referred to as a limit order to buy.
While a limit order does not guarantee the purchase of the desired stock, this is a helpful strategy. Day traders and investors who are trading in volatile stocks. They are useful because they can protect an investor from either buying too high or selling too low.
Continuing, limit orders to sell or to buy will also have expiration dates. When the order is placed with a broker, an expiration date is set for the transaction’s execution. That way the stock does not need to be sold immediately but can be sold on a later day if it reaches the limit. So, unlike a market order, a limit to sell does not need to be filled immediately, it can be placed with a defined time-frame for a certain price. If the sale does not go through before the expiration date, the order will simply be canceled. Because the sale is not mandatory there is a smaller potential for loss.
However, there is more work required by your broker when using conditional orders. Therefore, any kind of limit order usually costs more to execute than it would for your straightforward purchase or market orders. Market orders are the easiest and most straightforward way to secure an asset, and so they have fewer brokerage fees.
What’s more, limit orders require a certain amount of knowledge of the market. Because this is not the simple acquisition of a valuable security, a limit order means that the investor has some insight into the fluctuation of the market.
Finally, because of their predictive quality, limit orders can be interpreted as an indication of the direction of the market. Based on what stocks investors are using sell limits has the potential to offer foresight into what assets will be trending.
Comparing Investment Strategies
There are a variety of orders that investors can use. So, the use of one over the other is going really going to depend on the variables of the investor and of the security. That is to say, that there is not a one-size-fits-all when it comes to investment strategies and asset acquisition. To understand under which conditions an investor might choose one strategy over another, let’s look at a few kinds of orders available.
As I mentioned in brief, market orders are the most straightforward way to purchase a security or stock. A market order executes the purchase of an asset immediately. Market orders guarantee that the purchase will go through, but do not guarantee the final purchase price.
The catch is that using a market order the buyer may not get the stock at the last traded price. Once the sale is finalized, the final price is determined. As a result, the cost of a stock could be more or less than when the market order was placed. This is known as slippage, which results in an investor paying more or less than the asset was initially listed for on the market. Slippage is the result of time-lags and changes in the price from when the order was placed, to when it is filled.
So you can see why using limit order could be very beneficial.
Accordingly, a limit order is so called because there is a limit stipulated at which a security or stock can be purchased or sold. A sell limit order will therefore only be executed at the limit price or higher.
For example, a limit order to sell may be applied because an investor wants to sell shares of stock XY for a no less than $20 each. The investor then places a limit order to sell off $20 on stock XY. This sale is then only executed when the owner of stock XY is offered a price of $20 or more.
Buy Limit Order v. Sell Limit Order
As I mentioned at the start, there are many kinds of conditional orders, and there are two main kinds of limit orders: limit orders to buy and limit orders to sell. In order to better understand a limit order to sell, this article will continue to compare this strategy so others, primarily limit orders to buy.
A limit order is an order to buy or sell a stock for a specific price. The order parameters dictate to sell only once a stock reaches a specific price is available for purchase.
The current owner of the stock would use a limit order to sell. In the event that an investor currently owns stock worth $55 per share. However, she wants to sell if the price goes up to $60 per share. The owner can then set a limit order to sell at $60. Now, this order is only filled at $60 or more.
A few restrictions
However, you can only set a limit order to sell above the current market price. An investor cannot set the price lower than the market price because there is already a better price available.
A buy limit order is only executed at the specified price or lower, or the “limit price”. This is a strategy to avoid paying the current value of a security, and so it is not a straightforward purchase (a market order).
Because the investor does not use a market order, this means that the investor will not buy the stock at a higher, market price. However, as I mentioned, it may also mean that the investor does not get the desired number of shares or that she does not acquire the stock at all.
Why use a limit order to sell?
Limits are useful when dealing with volatile stocks. One of the causes of volatility is the time of year. But volatility can also be the nature of a certain stock. Either way, setting limits allows for more control over the sale or purchase of a stock in flux. So, rather than selling for a low market price in a fluctuating stock, the owner of that stock can control at what amount the stock will be sold at.
Setting a limit can, therefore, eliminate some of the concern one has about selling too low. The risk is a limit that can also mean that the owner holds on to a stock for too long, and misses out on the best available price in the event that the stock drops.
Another benefit to limit orders is that expiration dates can be used. So the limit has the potential to be within a reasonable time frame. Accordingly, the order is filled once the limit is met, which means the investor does not need to predict the exact date the limit will be met.
An excellent example to look at is Google’ stock. At the time of writing this article, Google’s market value is at about $1223. However, it opened today at around $1215. While this is only a few dollars difference, when acquiring large amounts of Google, that $8 will add up quickly. Moreover, while Google is a valuable stock, it is also a steadily changing one.
Limit orders are often used when investing in oil and gas as well because it is a particularly volatile market. For example, as of now, over the course of the week, Nexen’s stock value increased around $250. By using a limit order, it may have been possible to get in at the lower end. The reverse can be applied then for an owner of Nexen’s stock. If he knows that stock is moving, and wants to sell at a good time, he can set a limit order to sell, so that he can turn a profit on this volatile stock that is up.
A trader could then hypothetically place an order to buy 5,000 shares with a $6000 limit. In the event that the stock falls below that price, the trader can then buy the stock. The order will remain open until the stock reaches the broker’s limit or the order is canceled.
To learn more about how to understand market fluctuations, read about Relative Strength formulas here.
Stop Limits Orders vs. Limit Orders
One of the primary differences between as stop order and a limit order is that a limit order (to buy or to sell) can be seen by the market. The limit order is conditional as the stop price must be triggered. Consequently, a stop order is only been once triggered.
A stop order also, like a limit order, is conditional because the buy or sell is based on a price that is not available in the market at the time that the order is initially placed.
Moreover, a stop order is a two-part order and will only turn into an actual limit order seen by the market once the stop price has been met or exceeded. A stop order begins as a conditional order. Once live the order is processed as a market order.
Once the future price is available, a stop order will be triggered, but depending on its type, the broker may execute them differently. As a common practice, brokers now add the term “stop on quote” to their order types. This note makes it clear that the stop order will only be triggered once a valid quoted price in the market has been met.
It is similar to a limit order as it is an order to buy at a specific price. Stop orders are most common for acquiring stock and futures that trade on an exchange and are usually subject to the same fees as market orders. Because the purchase is not made immediately, these too are subject to slippage. Then, once the asset reaches the stop price, it is processed the same way a typical market order is.
There are also both buy and sell stop orders.
A buy stop order is a stop price above the current market price. While a sell stop order is set at a stop price which is below the current market price. Like limit order, investors often use stop orders as an effort to limit a loss or to protect themselves from loss of profit on a stock they own.
Learn more about Stop Limit Orders here on the blog.
Conclusion: Central Concepts in Brief
An investor uses different kinds of orders and investment strategies so they can be more specific about how they approach their investments. Different order types will dictate how and when a broker will fill your trades.
When an investor places a conditional order, like a limit order or a stop order, the main message is that he does not want to pay the market price. Instead, your order executes when the stock price moves in the right direction.
- A limit order places minimums and maximums on the sale or purchase of a stock, respectively. Limit orders are conditional because of the conditions. Put another way; if the desired price is not met for the sale or purchase, the transaction will not go through. Limits are not guaranteed acquisitions as they are not typical market orders. Also, unlike stop orders limit orders, they can be seen by the market before they are triggered. Moreover, because these are more complicated transactions they have more brokerage fees.
Limit Orders to Sell
- Limit orders to sell means that the owner of a security places a minimum price on its potential sale. This means that the owner of a security will only sell for a minimum price. The order also goes on the books with an expiration date. So the minimum is not the permanent sale price, but only a limit for a set time frame.
Limit Orders to Buy
- A limit order to buy is the reverse of a limit order to sell; because a limit to buy is a maximum that the stock of interest is purchased. Buy limits mean that the acquisition of new stock will only occur if the stock drops to the desired price limit. These also come with expiration dates. So, if the stock in question does not move down to meet the limit to buy, then the purchase will not be completed. A buy limit order can be particularly helpful to an investor who wants to acquire multiple stocks. When buying multiples, a little saving can add up quickly, depending on the price.
- Market orders are the only purchase order that is a guarantee. This is because a market order is a direction to purchase a security at market value. Because this is an order to immediate execution, there is no price guarantee. It is possible the market value will change from the time the order is made to the time it is processed.