‘Limit’ Orders Gain Fans Among Small Investors

Investors have gotten good advice lately from online brokerage firms such as Charles Schwab, which have counseled customers to use so-called limit orders on some types of stocks instead of more widely used market orders.

A market order is just that--an order to buy or sell a stock at whatever price it currently trades in the market.

A limit order, by contrast, tells a broker to complete the transaction only at a specific price or better.

Schwab has recommended that customers use limit orders on initial public offerings and other potentially fast-moving stocks, such as Internet-related issues, to prevent orders from being “filled” at prices that are far different from what was expected.

Customers have responded by significantly increasing their use of limit orders in recent months, Schwab said last week.

Indeed, using limit orders can be smart when buying volatile stocks such as Internet issues, especially for inexperienced investors. A market order for such stocks, in a fast-moving market, could mean you’ll end up paying much more than the price you last heard quoted.

With a limit order, you can set a maximum price you’re willing to pay. If the stock exceeds that price, your order won’t be executed.

But be careful when using limit orders in selling stocks. Often, it can be better to use market orders when you need to get out of a stock in a hurry, experts say.

Why? The risk is that a limit order to sell (at X price or better) won’t be filled if the stock already has fallen below that price. The danger is that the stock just keeps dropping, and by the time you can place another order, the price is drastically lower.

As many investors learn, stocks typically decline far faster than they rise. If a stock is moving against you, many professional traders say, it’s better just to get out “at the market” than set a limit.