What is a limit order in ETFs? All you need to know

A stock exchange is used to sell and buy ETF shares. When you purchase or sell ETF shares, you are dealing with another investor rather than the Fund Provider (e.g., Blackrock, ProShares) via a stock market. 

A stock exchange is a platform where several investors can buy and sell shares simultaneously for a set price. Orders are the instructions to buy or sell stocks.  

It is the responsibility of the exchange to organize all these bids because each investor receives the best possible price that meets their requirements. 

When trading ETFs, an investor can employ a variety of orders

To purchase and sell ETFs, some investors use market orders. A market order instructs you to instantly buy or sell ETF shares at the prevailing market price.  

A market order does not describe the price you wish to trade; instead, it specifies the number of shares you would like to swap. These orders are straightforward to comprehend and carry out. “You want to buy 25 units of the Vanguard Total Stock Market (VTI) at the best accessible price,” a market order says.

Market orders should not be made because 

You have no control over the pricing

The price displayed on your broker’s website is not always the price upon which the transaction is completed. The purchase can be made at a more excellent or lower price than what you planned. 

The broker may request more outstanding account balances than required

If you wish to buy ten shares at market price, you see a cost of $100, and you have $1000 in your account, your broker may want more significant balances in your account than you need.  

Even if your cash amount appears to be sufficient to fulfil a market order for ten shares, your broker may need a more extraordinary account because it does not know when your market order will be fulfilled. 

Limit orders do not have these flaws. They give you price control and, as a result, don’t force you to keep a more significant amount in your account than is required. 

A limit order instructs you to purchase or sell a precise amount of ETF units at a specific price. Only if someone else is willing to transact with you at that price will the limit order be honored.  

A limit order is similar to saying, “You want to buy 25 shares of the Vanguard Total Stock Market (VTI) ETF and am ready to pay up to $50 per share” or “You want to sell 25 shares of the Vanguard Total Stock Market (VTI) ETF, and the lowest you will go is $50 per share.” 

The bid and ask are terms used to describe the price at which market players are willing to swap ETFs. The highest price at which an ETF share can be purchased is the bid. 

The lowest price at which an ETF share can be sold is the ask. You can also glance through the order book to get a complete list of current buy/sell orders. 

The likelihood of your limited order being executed and the time required for it differ based on your specific price. You can generate orders with prices identical to or better than the bid-ask if you want to fill your limit orders quickly.  

A purchase limit order with a price a cent higher than the bid or a sell limit order with a price a penny lower than the ask is what we mean by slightly better. 

Just because ETFs can be traded the same way as regular stocks don’t imply, they should. Investors should understand the distinction between a market order and a limit order and why one trading approach may make more sense in some situations but not in others contexts. Viewpoints may sometimes turn prospective losses into gains.

Consult an expert advisor to get the right plan for you