The preferred order type for the everyday trade
We prefer the limit order for most situations. Simply put, they allow you to control your price. When you want to enter a trade, and you don’t expect it to be a very short term trade (seconds, minutes or hours), a limit order makes the most sense.
Limit orders in Questrade look a lot like market orders except for one big change – we now have the ability to set a “limit price.” This is simply the price we’re willing to pay or receive for the security – we’re no longer willing to just take what the market gives us. In this case, we’ve said we’ll pay $56.02 – the same as the ask. This ensures we’ll pick up those 6 shares that are currently being offered at the ask price of $56.02. What about our remaining 14 shares? Well, because we don’t have level 2 quotes, we don’t know what the next ask price is, but because we entered a limit order, it doesn’t matter. We won’t get those 14 shares until someone asks $56.02. If they never do, we’ll never get filled. So consider this when you’re placing an order – if you prioritize quantity over quality/price, you may need to enter a higher limit price.
And there’s nothing wrong with entering a limit price higher than the current ask. If you think the stock is worth $56.08, you can enter that as your limit price. You’ll still get filled starting at the lowest available ask and working up toward your limit. We’ve often entered limits above the ask and been filled well below. Sometimes, in a fast-moving market, if the ask drops below what it was when you got your quote, you’ll get filled there. We’ve entered limit orders at, say, $20, with an ask at $19.95, and been filled at $19.90, simply because the market dropped a bit between our quote and execution (if we were professional traders, we’d have mechanisms in place to manage this a little better, but fundamentally, if we think the stock is worth more than $20, and we get it at $19.90, who cares? If we were happy to own it at $20, then we’re even happier at $19.90).
To be clear, sell limit orders work the same way, with the obvious adjustments considering they’re, well, sell orders. We need to look at the bid, not the ask. We set our limit and that’s what we’ll get for the sale of our security, regardless of the market. If we set a sell limit price below the bid, then we’ll get filled at the bid and beyond, to the limit price. If we set a sell limit price above the bid, then we may not get filled immediately, but rather, only when the market moves up to our sell limit order price.
To recap, a sell limit order is generally preferable to a market order. It allows you to manage your price. Especially on thinly-traded stocks (ones where the last trade was many seconds, minutes or even hours or days ago), we can avoid getting “gapped” – which is what happens when you see the last trade on a penny stock at $1, put in a market order to buy, and the next ask is at $1.30 – 30% more than you intended to pay.