Buying Strategies
Part I: The Best Way to Buy Your Stock
September 16, 2007
By Chandler Lutz
The Other Parts in the Series are coming soon
Once you find a great company at an attractive price the last thing to do is make the purchase. This is most exciting part of the whole investing process (except for the large returns of course). Unfortunately, for many investors placing the order for the stock is where a lot stress and anxiety occurs. Investors worry about the price they are going to pay and if the price is going to change dramatically from the time the order is placed to when the order is executed.
To often circumvent these concerns investors often use limit orders. A limit order allows investors to buy a certain number of shares at a given price. For example, if I place a limit order for Company ABC for 50 shares at $10 it means that if the order will only be executed only if the price reaches $10 or less. If the stock price never reaches $10 then the order is never carried out. (Most brokers do not charge if you place a limit order and that order is not executed, but check with your broker just to be sure)
The other option is a market order. With a market order you specify the number of shares you want to buy, the order is executed and you pay the market price.
So, the best option is a limit order right? We’ll, not exactly. Consider StockBox Pick Aegean Marine Petroleum (ANW). When we first announced Aegean as a StockBox Pick, the price was $19.05 per share. The share price has never been that low since (given the time this article was published). If you placed a limit order your purchase would never have been made and you would have missed a small run-up in ANW’s share price. It’s possible that the price could return previous levels, but it may not.
With a market order you don’t have to worry about these concerns. For these reasons, we recommend that investors use market orders. When you have done all the work to find a great company, just use a market order. This will ensure that you purchase the company and you can realize all the efforts of your research.
In the big picture, 15 or 25 cents a share per order won’t make much of a difference especially if you are shooting for gains measured in thousands of percents . In fact, Warren Buffett readily admits that his biggest mistakes at his tenure at Berkshire Hathaway were those of omission. After all, a stock can only go down one hundred percent, but there is no limit on how much a stock can go up. Again, once you find a great company at an attractive price, just use a market order to make the purchase.
Market orders also save you tons of stress and anxiety that persists with limit orders. When limit orders aren’t executed, investors often stress and worry about whether or not to raise the price or submit a limit order in a different way. If you use a market order, you don’t have to worry about all this. Plus, you could use all the time you save with a market order to finding new companies or spending more time with friends and family. Certainly, this extra free time (and lower stress levels) is definitely worth the extra dimes and nickels that a limit order may cost you.
Parts II and III are coming soon.
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Chandler Lutz own shares in ANW