Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

A limit order is a useful tool for investors who don’t want to overpay for shares. Unlike a market order, in which a trade is executed at the prevailing market price, limit orders allow stock pickers to specify the limits at which they feel comfortable paying.

To understand how they work, I caught up with Steph Ochmann, a Stockbroking Manager here at Fidelity, who told me all there is to know about limit orders and how best to use them.

Hi Steph. Let’s start from the top - what exactly are limit orders?

Hi Toby. A limit order allows you to specify the maximum or minimum price at which you’re willing to buy or sell a particular share. They can help investors who are interested in buying a share, but don’t want to go above a certain price they feel comfortable with. Likewise, they can benefit investors who are selling who don’t want their order to go below a certain price.

Why would I use a limit order?

Limit orders are a good way to ensure that you won’t get a worse price than you expect. This can be particularly useful in volatile markets when prices can change suddenly. The system can check the price on your behalf when you’re not watching the stock.

They also mean you can enter (or exit) an investment with more precision than an ‘At Best’ order which cannot guarantee the price you pay. What’s more, if there is a better price available than your entered limit, your order can still trigger, so you may end up paying even less for purchases or you may receive more proceeds from your sale than expected.

How do they work?

Once you place a limit order, it will be monitored by a limit order minding system. When the system receives a notification that the bid or offer price matches your limit price (or better), it will start searching for a quote and the trade will be sent to the market to execute.

Orders will only execute if the market can fill it, so it is important to point out they are not guaranteed. Unfilled limit orders will automatically expire when the market closes at 4:30pm so if your limit order does not fill, you will not be charged and you will need to resubmit your instruction for it to be valid for the following market day.

What happens if there aren’t enough shares trading at my limit price?

In order for the trade to go through, it’s not enough for just the price to be right - there also needs to be sufficient liquidity. In other words, a stock hitting the price specified will not execute if there isn’t a sufficient volume of shares trading at or better than your limit price. It’s important to think about the market fundamentals of supply and demand here; your order will only execute if it can be filled in its entirety.

What else do I need to think about before placing a limit order?

Remember, a limit order will only trigger when your specified limit has been met and there is liquidity in the market to fill your full order, so it is not guaranteed. It’s worth keeping in mind that share prices can change quickly, so a stock may trade at your limit price for a split second, and this may not be sufficient time for your order to execute.

Important information: When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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