When and How to Sell on a Limit Order

L imit orders help you control how much you earn on a trade. Many experienced traders consider limit orders invaluable tools for success. Let’s explore how to sell on a limit order.

Key Takeaways:

  • Limit orders let you buy or sell a stock only when it gets to a price you determine in advance.
  • When you sell on a limit order, you can protect yourself by ensuring your trade won’t actually execute unless you get the price you want.
  • However, a limit order can block you from additional potential profit if a stock price rises higher than you expect.

What Is a Limit Order?

Image via Unsplash by austindistel

You can use a limit order to either buy or sell a stock once it reaches a price you determine in advance. If you’re using a buy limit order, that will execute the trade at the set price or lower. If you’re using a sell limit order, that will execute the trade at the set price or higher. In other words, a limit order only trades the stock at the given price or better than that price. You can set a limit order indefinitely, or you can set one with an expiration date.

Keep in mind a limit order won’t always execute. Your trade only goes through if the market price of the stock you want to trade reaches or improves upon the price you set in the limit order. If the stock never ends up getting to that price, the order will not execute. The order also might not execute if the stock price doesn’t remain at the right level for a long enough time.

Limit Orders vs. Market Orders

When you place an order to either buy or sell a stock, you’ll encounter two main execution possibilities for price. You’ll either place your order ‘at market’ or ‘at limit.’

A market order is a transaction that is meant to be executed as soon as possible using the present, or market, price. A limit order, on the other hand, sets a minimum or maximum price at which you’re willing to sell or buy.

You can think of limit orders like negotiations. With a market order, you see the price and agree to pay that price. With a limit order, you refuse to finalize your deal unless your price is met.

Here’s another way to compare the two types of orders: Market orders deal with an order’s execution, making the security’s price a secondary consideration to the speed of completing a trade. Limit orders deal instead with price, and if the value of a security sits outside the parameters you put forth in your order, the transaction won’t occur.

Common reasons to choose a market order include:

  • You want to get a fast execution, no matter the cost.
  • You want to trade stock that’s highly liquid with a narrow bid-ask spread (usually a penny).
  • You want to only trade a few shares (for instance, fewer than 100 shares).

Common reasons to choose a limit order include:

  • You want to specify the price of a trade, sometimes because it’s very different from the current stock price.
  • You want to trade a stock that’s either illiquid or has a large bid-ask spread (typically more than $0.05).
  • You want to trade a large number of shares (for instance, over 100 shares).

Advantages and Disadvantages of Limit Orders

Limit orders offer a way for you to make sure you don’t miss an opportunity in the market. Some benefits of limit orders include:

  • Ability to capture short-term market fluctuations: You can put in a series of limit orders to sell and buy stocks to take advantage of opportunities that market volatility creates.
  • Access to undervalued stock: If you think you see a stock that’s undervalued, you could decide to purchase the stock and then sell it on a limit order. You would set a limit order to sell the stock once that price goes up as you expect it to do. (The opposite also works: If you think a stock is overpriced, you can place a limit order to purchase shares when the price drops.)
  • Control over your portfolio: Limit orders give you a way to control your portfolio even when you’re not actively monitoring the stock market. You might end up being busy during a time of high market volatility on a given day, but your brokerage will still trigger the trades you want when you have a limit order in place.

Disadvantages of using limit orders exist as well. For example:

  • You can block yourself from making a trade. If you end up setting your sell limit too high (or your buy limit to low), your stock never trades. Let’s say you have a stock trading at $10 per share and you set a limit order to sell if it reaches $15. The stock may move as high as $14 before going back down to $10 per share, but the limit order never executes because the share price never hit $15, even though you still would have made a decent profit.
  • You can lose out on profits if the stock price changes more than you expect. Say you set a sell limit order of that same stock to $15, and this time, the stock price does reach $15. Your order goes through at that point. Then, shortly after, the stock continues to rise to $19 per share. If you set a sell limit too low, you can end up selling your stock too soon and missing out on additional potential gains.
  • Your trade isn’t guaranteed. Even if the share price reached the price you set, the price may change again before your trade can be executed.

How Do You Sell on a Limit Order?

You should take several steps when you want to sell a stock using a limit order:

  1. Research the stock to set your price. Keep in mind that the price you set for the limit order will be higher than the current stock price, so you’ll need to decide how much higher you think the price will rise. You should take a few factors about the stock into consideration when determining the price you want to get for your shares, such as:
  2. Decide the number of shares you want to sell at the desired price. You can choose to sell all of the stock you have in a given company using a limit order. Alternately, you can sell just a portion of your stock so you can stay invested in the company while still converting some of the investment you’ve previously made into cash at your desired price.
  3. Decide how long you want your limit order to stay in effect. You get to determine how long your order remains in effect. Common examples include:
    • Day orders: These orders remain in effect for one trading day only.
    • Good until canceled, or GTC: These orders remain in effect for longer periods.
  4. Initiate a new trade. You can typically do this by contacting your broker or just logging into an online brokerage account. You’ll want to set the trade as a limit option to sell the number of shares you decided to sell at the price that you determine. You should also let your broker know if you want the limit to be set up as GTC or as a day order. Your broker will likely ask for these pieces of information:
    • Transaction type (whether you’re buying or selling).
    • Number of shares.
    • Security you’re buying or selling.
    • Order type (this is how you will specify that you’re placing a limit order, instead of a market order or another type of order).
    • Price.
  5. Check if the limit order was successful. Contact your broker or check your account. Generally, your shares will sell if the market price meets your limit order price — and the price stays at or above the price you set for a long enough period that your trade can be executed. On the other hand, you’ll retain your shares if the price either doesn’t meet the price you set in your limit order or the share price drops down below the price in your order before a trade can be executed.

You’ll want to keep a few warnings in mind if you’re selling on limit. First, there’s no guarantee that limit orders will go through. They definitely won’t be executed if the share price doesn’t reach your set limit. You should also check in with your broker to find out how their fees on limit orders may differ from fees on other types of trades, as many brokers charge more for limit orders than market orders.

A ll in all, limit orders can be very useful (but not foolproof) tools. Limit orders protect you from extreme losses, but that same mechanism can stand in your way of getting unexpected gains. Highly volatile markets are one prime example of when selling with a limit order can make you lose out on additional profits (or, if you’re buying, additional shares) as the limit order can be executed before prices stop rising. However, if you set a price at a point where you can live with the outcome either way, you’ll gain control over the price you receive.