The previous example was trading at it’s basics, and there are many “tools” available to us that we use to help limit our risk. One of these would be the “limit” order. Here, what we do is tell the broker that we want to buy XYZ with a limit of what you are willing to pay for XYZ. The limit order comes in handy when a stock is really flying, and when you get the price of XYZ at 50 you don’t learn later that you were actually filled at 55 because it was flying so fast! So in this case (XYZ is at 51 and rising) what you would do is (broker’s comments in italicized type):
“Mrs. Jones, how can I help you?”
I want to buy 100 shares of XYZ with a 53 limit.
“Okay, let me read this… you wish to purchase 100 shares of XYZ with a 53 limit. Is that correct?”
“Will that be a day order?” (*NOTE: a day order means that the broker will electronically place your order and anytime during the day if it can be filled at the price you requested it would happen. Once the day is over the order is automatically cancelled. In this instance, if it is below 53, you will get filled at the current price.)
“Okay the order is sent, anything else?”
Now even if XYZ is higher than 53 if it happens to pull back anytime during the day it will be filled. If XYZ is below 53 it MUST be filled at the lower price.