April is Financial Literacy Month. Debt reduction, saving, and investing are key elements of a successful financial plan. There can be confusing terminology (words…lol) linked to personal finance. A quick tip: sign up for Investopedia’s Term of the Day email. They even have a dictionary on their website. I’ve learned so much this way and it is likely how I first learned what it meant to use limit orders. What does a limit order mean? What are the pros and cons of using one? How do you go about setting a limit order?

Definition of Limit Order

A limit order allows you to buy or sell a stock or ETF at the price you want without having to watch the market constantly. So let’s say that you want to purchase a stock that costs $20 but only once the price drops to $17, instead of just buying the stock at its current price, you can set a limit order. When you set a limit order, you set the price you want to buy a share for and how many shares you want to get. Your brokerage account will usually keep the money needed to purchase it in cash so you can’t mistakenly use it to buy something else. If and when the price drops to $17 or below, the order will go through without you ever having to think about it again.

The opposite applies with a sell limit order. Let’s say you want to sell a stock once a share hits $20. You go to sell it but set a limit order of $20. If and when the price goes to $20 or above, the order will go through.

Stocks versus Mutual Funds

Most of my money is invested in index mutual funds. It makes investing simple with great results. So if you want to keep it simple, I would look for funds that fit what you are looking to invest in and keep it at that. You can purchase as little or as much as you can afford for the most part. Just keep an eye out for minimum investment requirements.

READ MORE: How to Invest – What You Need to Know About Mutual Funds

So while most of my money is in index mutual funds, I purchase stocks from time to time that makes sense to me. I don’t do it often because honestly, it stresses me out. When I purchase a stock and it goes down significantly, it makes me nervous and confused. I ask myself, “Should I buy more now that it’s cheaper, or does this indicate it was a bad choice?” Some of these purchases take years to recover. Others never do. For this reason, I keep stock purchases to a minimum. However, they may interest some.

If you’re a beginner investor, I would stick to index mutual funds until you become more financially literate. I wouldn’t recommend buying a stock just because you read a tip. The person who wrote the tip may not even purchase the stock they are recommending. So the person holding the bag at the end of the day if you act on that tip is you. Get familiar with how to invest in stocks and what to look for so you can buy with confidence.

Why I Like Using Limit Orders

Now that you are more confident and feel like you are comfortable investing in stocks, limit orders can help you to purchase and sell stocks without watching the prices fluctuate by the day. Every stock in my portfolio has a limit order set for a dollar amount I have decided I am comfortable with for it to sell at. You don’t have to do this at all. Buy and hold investing is ideal. Imagine: two people buy Apple shares when it cost $25. One sells when the price goes up to $75, tripling their initial investment. The other still has them today at about $130. That person has now over 5 times their initial investment. And likely, Apple will continue increasing in price for years to come. Main point: if you choose to invest in stocks, it is ideal to choose companies you believe will go the distance.

The reason I have limit orders on each stock I have is that I prefer to invest within index mutual funds. So while I dabble from time to time in stocks, I use those earnings to invest in mutual funds. This is just so much better for my mental. Personal finance is PERSONAL! Do what works best for you. Just make sure you are confident in what you’re doing.

How to Set a Limit Order

This will look different depending on your platform. On most of the ones I have used, I use the same process I would use to sell or buy a stock normally. Then, I just choose to set a limit order. It asks for a limit price and how many I want to sell. You can sometimes also set time limits on these orders. Most of the options available to me are either related to the next trading day or keeps the order active forever unless I go cancel it. The second option is best if you never want to have to go into your account every day. I always choose to execute all or none for the same reason.

Not all accounts have the ability to set limit orders. The ones who do may not have all the same options I do. So get to know your platform. If it doesn’t provide the options you want to see, look into other platforms that fit your needs better.

Limit Order in Action

In 2020, the pandemic created a huge downturn in many industries. The one that stuck out to me the most was the travel industry. I was already in possession of American Airlines shares because it has a long history and, I believe, a long future ahead. I describe these sorts of companies as “companies that aren’t going anywhere”. Those are just my opinions of course. As I watched the price of the shares tumble, I saw an opportunity because this is a company that I knew would stick around for the recovery. When that recovery would be, I didn’t know but that’s the beauty of buying with confidence. It didn’t matter when it was going to happen. I just knew it would.

I purchased more shares a few times on the way down but I’ll just share one example. On March 17, 2020, I bought 186 shares at $13.41 which cost $2494.26. I set a limit order to sell when it rose to $22.50. It sold on March 5, 2021, totaling $4184.97, making a profit of $1690.71. I made a decision in 2020 that I was able to set and forget. I still possess some more of these shares as the value continues to rise with limit orders in place to sell when they reach my next price goal.

Buying stocks is not for everyone. It can bring intense pressure so consider that when making investment decisions. What is your investing personality? How much time and brain power do you want to devote to investing? I prefer to invest in index mutual funds because someone else is doing most of the work for me. While the rush of a successful stock purchase is exhilarating, when you purchase duds (which I have a few of), it can be depressing. My mental has been much better since moving most of my portfolio into index mutual funds.

Your turn. Have you heard of limit orders before? Do you use them or any other kind of special order when trading? What do you think is your investment personality? Share in the comments below.

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