Something you should know is that trades on the U.S. stock market are typically conducted through a "market order." This means that the investor who decides to buy or sell a stock accepts the market price at that moment. The market price is executed following the NBBO rule. However, limit orders can also be executed.

How do limit orders differ from market orders? In this Hapi article, we explain everything you need to know about limit orders, the benefits they offer to investors, and how to use them through the Hapi app.

What are limit orders and how do they work?

The main difference between a market order and a limit order is that market orders execute the immediate purchase or sale of a stock at the current market price, while limit orders allow you to delay the execution of transactions until the stock reaches a specific price. Additionally, a limit order can be valid until the order is fulfilled (Good Till Canceled) or until the end of the day (Good Till Date).

In simpler terms, you can choose the price at which you buy or sell a stock automatically, thanks to limit orders. The price at which the order is executed is guaranteed, but the order isn't always fulfilled. Limit orders will only be executed if the price meets the order's requirements. There are two main types of limit orders:

Buy Limit Orders

Also known as an open limit order, it is used to buy an asset at a price different from the market price. You can set it so that if the stock price falls below a certain amount, a purchase is automatically made. It helps set a maximum price at which you will buy a stock.

Sell Limit Orders or Take Profit

These can be used for open positions, meaning you’ve already purchased the stock. With this type of order, you can trigger a sale if the price rises above a specific threshold.

An example of a buy and sell limit order on Hapi

With Hapi's new feature, you can easily trade using buy and sell limit orders. When making a purchase or sale, select the "order types" option. From there, go to "conditional orders" and then "limit orders."

For a buy limit order, imagine you want to acquire Alphabet (GOOGL) stock, which is currently trading at $98.42, but you believe it could reach a more attractive price of $90 in the future.

You could place a buy limit order at $90 by specifying it as the "amount." If the stock price drops, you would get the stock $8.42 cheaper than if you had executed a market order.

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Now, let’s look at an example of a sell limit order. The process on Hapi is quite similar to buying. Suppose a stock in your portfolio has seen a strong upward trend, and you believe it won’t last much longer. Again, select "order types" and then "limit order."

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Currently, the stock is worth $98.54, and you bought it for $90. If you want to secure your profits, you can set a sell limit order at $105. To do this, set the amount and select “continue.”

If the stock reaches that price, the sale would be executed automatically, and you would see $105 in your account. If the stock later drops below $105, your strategy would have been effective.

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Why are limit orders important?

When trading stocks, it's important to understand that a limit order allows you to specify the maximum price you're willing to pay or the minimum price you're willing to sell. This can help protect you from overpaying for a stock or selling it for less than desired.

Specifically, a buy limit order ensures that the buyer does not get a worse price than expected. Buy limit orders provide investors with a precise way to enter a position. The same applies to sell limit orders, ensuring that the investor sells the stock at a better price than the current one.

Likewise, a limit order can be useful if a trader is not constantly monitoring a stock and has a specific price in mind at which they'd be happy to buy or sell that asset. This offers more peace of mind and personal time in the stock market.

How to use limit orders?

To set the price for a limit order, you can rely on two main approaches. Fundamental analysis helps you determine a company's intrinsic value to buy or sell it at a fair price. Technical analysis helps identify good entry and exit points for stocks based on trends, support, and resistance levels.

Ultimately, it’s important to understand the difference between market and limit orders, how they work for buying and selling, and why they are crucial for your investment strategy. If you want to apply this tool to buy and sell stocks at better prices, download Hapi now. Hapi is an app for trading stocks without commissions and cryptocurrencies from Latin America. Trade with limit orders here.

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