Limit Order Guide

For example, if Vodafone shares were currently at 120p per share, you could place a limit order to buy 100 shares at 115p per share, and this instruction would only be sent to the market if the Vodafone share price dipped to 115p or below.

Alternatively, if you already held Vodafone shares, you could place a limit order to sell 100 shares at 125p per share, and this instruction would only be sent to the market if the Vodafone share price rose to 125p or higher.

In short, a limit order is an instruction to buy or sell shares in such a way as to take advantage of, or protect against, market fluctuations and achieve the best possible trading price, without having to constantly watch the market.

When to use a limit order

There are two basic types of order that every investor should be aware of - the market order and the limit order. 

A market order (sometimes referred to as trading 'at best'), is an instruction to buy or sell immediately at the best available price.  These orders are likely to be executed at, or very close to, the bid and offer prices, but there's no guarantee of the price that will be achieved.  Although barring any technical problems, these orders will be guaranteed immediate execution.

A limit order offers the alternative scenario.  There is no guarantee of execution timescale, but if it is executed it will be guaranteed to be at, or below, the specified price for a buy order and at, or above, the specified price for a sell order.

As some brokers charges the same commission for placing either a limit order or a market order, the choice of which to use is dependent upon the relative importance of guaranteed price against guaranteed speed of execution.

·         In a steady market, on a highly liquid stock, limit orders can be used to take advantage of positive market fluctuations, i.e. short term price rises if you're selling stock, or short term dips if you're buying stock.

·         Alternatively, in a volatile market, such as with less frequently traded stocks, or stocks reacting against market news, a limit order can be used to protect against adverse price fluctuations. 

·         Finally, limit orders can be used to protect against the volatility caused by the early morning opening auctions which are used to set the market prices ahead of the day's trading.  If you're placing orders outside of market hours it's advisable to set a limit order to avoid losing out in this early volatility.

Contingent Stop orders

A Contingent Stop Order is similar to a limit order.  It's an instruction, given by you, to buy or sell shares within a specified price range.  Unlike a limit order, these instructions are initially dormant and are only activated if the market reaches a specified trigger price.

A Contingent Stop Sell Order, commonly referred to as a stop loss, is used to protect the investor against large price falls on the stocks within an existing portfolio, perhaps when they're away on holiday. 

For example, if Vodafone shares were currently at 120p per share, you could place a contingent stop order to sell your shares if the price fell to between 70p and 100p (at which price you might still be making a small profit), but not to sell if the price fell any further below 70p per share, (at which point you would make a loss and would prefer to keep the stock).

It's advisable to always set a contingent stop order on each of your major shareholdings before going away on a long holiday

Contingent Stop Buy Orders are used by more sophisticated investors to buy stock in their absence, but only when the price has started moving steadily upwards, (i.e. they may be using charting or analysis to plot resistance levels and 'break-out' prices). 

For example, if Vodafone shares were bouncing in the 120-140p price band, but with resistance at the 140p level, you could place a contingent stop order to buy shares only if the price rose beyond 145p at which point you felt it would then continue upwards, giving your your profit margin.

Please note that whilst a limit order will be placed with the market when the specified conditions have been met, there's no guarantee that it will be executed.  This could be due to many reasons, including insufficient funds, the price of the stock moving too quickly or if the order quantity is too large to execute.