Wednesday, August 21, 2013
Wednesday I purchased stock with a limit order for the first time in my life. While I have long owned various stocks I was not an active trader and had no need for a brokerage account until recently. However my new employer required me to sell most of the IBM stock which I had accumulated through an employee stock purchase plan over many years. I could have sold it through the plan itself but it was much cheaper to transfer the stock to an online broker and sell through them instead so that is what I did. I thought I should reinvest the proceeds in the stock market. I did reinvest the majority some time ago but my usual procrastination left some proceeds in cash (not such a great move as the market has been going up). But I finally figured out some more stuff to buy. When I did so I used limit orders (as opposed to the market orders I had used previously). These are pretty simple to use, normally cost no more, and guard against getting your order filled at a completely unexpected price due to some market glitch. Such glitches are perhaps unlikely but as news reports show occasionally do occur and it seems reasonable to guard against them. So I placed limit orders a few cents above the bid ask spread to protect against an unexpected price spike. As I expected my orders went through right away (although in one case at my limit) just like market orders would have. Limit orders are a bit more work and have some potential pitfalls (like only getting a portion of your order filled) and so may not be worth the bother to protect against what are unlikely events in most cases. However in some cases (like trying to trade an illiquid security) they seem to offer worthwhile protection so it seems useful to know how they work.