30 Days to Becoming a Better Investor – Day 10

I have a quick tip today for you to improve your investment game. When placing an order with your broker, I recommend that you use limit orders.

With a limit order, you specify the price you are willing to buy or sell a certain amount of shares within a give time frame. The broker must then either match or get you a better price than your limit price. The order is either good for a day or you can specify that it remain open until you cancel it (i.e. good till canceled (GTC)).

It is especially important to use a limit order when buying or selling thinly traded stocks. Thinly traded stocks of small companies can have large spreads between what the market is offering to buy versus sell a stock. These two prices are referred to as the bid and ask prices. In addition, the price can often move dramatically in a short period of time for thinly traded stocks, and you can end up with a raw deal if you don’t use a limit order.

When I purchase stock in small companies that are going private, I always use a limit order. On a few occasions, my purchases ended up being the only shares bought for the entire day for the company! Without a limit order I could have ended up potentially paying five to ten percent more for the stock, which would impact my investment returns in these companies dramatically.

The only danger in using a limit order is that you set a buy price too low and end up missing a great investment opportunity. I minimize that danger by placing limit orders that are very close to the average price for the day for the stock I want to buy.

Some brokers charge more for limit order. I recommend that when you are shopping for a broker that you really focus on the commissions charged for limit orders in order to compare the costs of various brokers. Many times brokers will advertise a very low trading costs, but you really need to be sure that their limit order commissions are not dramatically higher in price.

Get involved in the 30 Days to Becoming a Better Investor community event. You can learn all about it by reading the introductory post.

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