When you buy or sell stocks, you can choose between two types of orders:
* Market orders obligate you to buy or sell at the current trading price.
* Limit orders puts a cap or a floor on your trading price.
Savvy investors may prefer to use limit orders. Suppose, for example, you like a company’s prospects but you think the current $100 trading price is too high. You could enter a limit order at, say, $90 or $80. If the stock falls to that price, you’ll buy it. Thus, if you can be patient, a limit order may allow you to purchase that stock at a favorable price.
Limit orders also can be used on the sell side. Say you buy a stock for $80; you might enter a stop-loss order at $70, to limit your downside in the stock.
Suppose that $80 stock goes up to $100. You might raise your stop-loss from $70 to $90, to lock in a gain from your original $80 purchase price. If the stock keeps moving up, you can keep moving up your stop-loss order.