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Earlier this evening, I was asked a number of questions from a newcomer with whom I have been having an off-line exchange. In answering these questions, I suggested one problem might be avoided by using limit orders. To my surprise, my Email pal (I guess there aren't pen pals anymore) had not heard of this term.

So, with the hope that it may be of some value to others, I thought I'd just repeat my answer:

The difference between market, limit and stop orders (not to mention Fill or Kill Orders, Day Orders, Good till Canceled Orders, All or None Orders, Do not Reduce Orders, etc.) should be outlined in your materials from your discount broker -- YOU ARE USING A DISCOUNT BROKER. The short answer is that Market orders allow the broker to fill your orders at (presumably) the best price it can get, period (you must take his word on what that price was). Although rare, I have read posts from investors indicating their belief that they were taken advantage of by their broker (or the market maker) when placing such orders.

I have only experienced one horror story, but it was enough. It went something like this: (1) stock closes at 40; (2) I place order overnight; (3) stock opens at 42, but shoots immediately up to 51 before drifting back and closing day at 37. My order -- filled at 50 1/2. Since that day, I place all market orders when the market is open while I'm looking at the real time bid and ask price on my screen. Perhaps, it's not necessary, but it sure makes me feel more secure.

In any event, Limit orders seek the purchase (or sale) of a security at a specific price or better. If the stock does not hit that price, you don't buy it. However, you need to realize that, on occasion, a security may trade through a specific limit price without the broker executing your trade. This is more likely in a thinly traded stock or one that experienced explosive volatility during the session.

You should also be aware that if you use limit buy orders in an attempt to get a specific stock at a slightly lower price than the one it is currently trading at -- you may end up chasing the stock up (if it never hits or trades through your limit price). This is particularly true of the screen stocks (utilizing RS) that are making so many of us so much money lately.

Finally, stop orders are used to protect a gain or limit a loss. In other words, you would place a sell stop order below the current bid price -- in order to guard against an extraordinary loss. However, once again, there is no guarantee that your stop order will be executed at that price. If the security drops precipitously, the broker will sell the first chance it gets (which may not be at your stop, but when the security hits the bottom -- and before any bounce back).

You can guard against such an occurrence with a stop limit order. This order will be executed only if the broker can sell the stock at the price you indicated. Once again, if the stock moves fast (and doesn't bounce back) you'll be stuck with it and may end up chasing it down. Which, in my opinion, hurts even more than chasing it up. I know, I've done both.

Although somewhat basic (and slightly OT), it is my hope that this message may prove informative to some readers of this board. In particular, those who are trading in IRAs and cannot stand having even a few dollars sitting around.



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