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Although the limit and stop orders are great points to look into for an investment, you have to be cautious. The biggest issue with an order is that it might not execute a trade at the specific value you want. This might sound great for when you are selling a stock. For instance, you might want to sell a stock at $20. The stock might experience a shift where it moves from $19.95 to $20.15. This means you will get the stock sold off at $20.15. It is a little higher than what you placed the order for, thus giving you a slightly better profit. Such rises might be extremely minimal in value, but there is always the chance that a significant rise in the stock’s value will happen right before the signal for selling it is sent out.
This might also work for some cases where you are trying to buy a stock. You might want to buy a stock when it reaches $20. If the stock goes down and reaches $19.80, you will at least get a slight bargain as you will pay a few cents less per share.
It will not work the other way around. Your request to buy at $20 might turn into a buy at $21 due to a dramatic spike in the value of the stock. This is for cases where you wish to buy a stock when you feel it is growing, but sometimes that growth might happen too fast and you are spending more on the stock than what you might afford.
You could also have a limit order to sell the stock when it gets to $30 or lower. A stock might be listed at $30.05 and then fall down to $28 in just a few moments. This means you will lose even more money than what the limit order was for.
This is a real worry as you are not guaranteed a certain total for any losses that might occur. You might think that you will only lose a certain amount of money in a worst-case scenario, but there is always the chance that the stock will fall well below that worst case amount.
A good strategy to use in this case is to establish a separate stop order to go alongside a limit order. This will keep the losses on your limit order from being too intense. Be advised that this costs extra. You have to measure the commissions charged for this order versus the possible savings you might realize to determine if this is actually a good idea or not.
Review how large the time gaps are in between each trading period through your broker as well. Sometimes the stock prices are updated every 15 to 30 seconds. Others might offer updates every minute. The shortest times are best because you will at least keep the overall risk of a stock dropping in value from being too intense.
