Profiting from Limit Orders (Bid & Ask)

[DoddDisciple]

Here's something I'm curious about. You have a stock you're interested in. You have a price in mind. How do you price your limit order? If the market price works, do you try to take a little of the upside, maybe putting in an order 0.5% below market? Maybe make an order at the daily low and wait if it's greater than a 0.5% difference? Or do you really try to take and edge and do something with a longer price period in mind, say cut the difference between 52 week low and market price?

 

What about on sales? The same questions would apply, but do you also perhaps leave some ludicrous ask prices out there in case someone makes a market order? As an example, I was looking at MAXX and saw the market price was $686.01, but there was a $199,999.99 ask for some poor sap who made a market order for 2+ shares.

[no_free_lunch]

When I am buying, it depends on how high conviction the idea is.  For high conviction ideas, I set a limit at the asking price just to get in.  What is a fraction of a percent if you think it is going to double?  How easy would it be to find an equivalent quality idea if the price shoots up while you are playing around?  For lower conviction ideas, when I am thinking about scalping a fractional percent that is a warning sign for me that maybe I shouldn't be in the thing.  The one exception might be merger arb where those percents really matter.

[compoundinglife]

I do everything with limit orders just to be safe and generally price the order so it will execute right away. I am buying because I think stand to make some decent money so I am not going sweat paying a tiny bit more to get the stock.

 

In the past I have thought about leaving a few real low ball orders open on stocks like BRK.A to see if I get lucky but haven't bothered.

[Hielko]

I usually try to buy at the bid, but it depends on the liquidity and how good the ask price is. I often buy stocks that have a limited liquidity and a wide bid/ask spread. Better to have a bit of patience so you don't have super high trading costs in those cases, and when you provide liquidity you can get a rebate on your transaction costs as well.

[oddballstocks]

I have missed out on too many stocks because I've tried to buy at the bid, or nickel and dime on the buy price.  As no_free_lunch said if you think the stock is going to rise 50-100% or more why do a few pennies matter?

 

If I am sitting at the keyboard thinking about pennies around the bid I need to ask if my investment thesis is sound. 

[writser]

IMHO it depends quite a lot on the liquidity in the stock. If you want to trade MSFT I don't really care, but with some illiquid stuff it is not advisable to lift the offer straight away.

[oddballstocks]

IMHO it depends quite a lot on the liquidity in the stock. If you want to trade MSFT I don't really care, but with some illiquid stuff it is not advisable to lift the offer straight away.

 

Depends on what's out there though.  I've limited above the offer on some illiquid stuff because after talking to a market maker I've learned there are a number of shares slightly higher that I can take out at once.  Or I can coax someone into the stock by offering a higher price, if I offer the bid I'll never get shares.  I'd rather have a position at a percent or two higher rather than have nothing in some cases.

 

 

[Hielko]

IMHO it depends quite a lot on the liquidity in the stock. If you want to trade MSFT I don't really care, but with some illiquid stuff it is not advisable to lift the offer straight away.

 

Depends on what's out there though.  I've limited above the offer on some illiquid stuff because after talking to a market maker I've learned there are a number of shares slightly higher that I can take out at once.  Or I can coax someone into the stock by offering a higher price, if I offer the bid I'll never get shares.  I'd rather have a position at a percent or two higher rather than have nothing in some cases.

Sure, I sometimes buy at the ask as well, but two things to consider:

 

1. If you are indeed buying something that will go up 100% saving few pennies isn't important. While I usually think that the things I buy have that kind of potential the truth is that in reality that's usually not the case. I think for most people generating 5% alpha would be an impressive result. If you incur a couple percent trading costs when you buy and sell, and your average holding period is a year than almost all your possible outperformance disappears. Saving a couple percent can be very very significant I think.

 

2. How often do you buy something that only goes up after you bought it? Usually I get an opportunity to buy it cheaper, so you don't need to be in a rush to enter your position.

[oddballstocks]

IMHO it depends quite a lot on the liquidity in the stock. If you want to trade MSFT I don't really care, but with some illiquid stuff it is not advisable to lift the offer straight away.

 

Depends on what's out there though.  I've limited above the offer on some illiquid stuff because after talking to a market maker I've learned there are a number of shares slightly higher that I can take out at once.  Or I can coax someone into the stock by offering a higher price, if I offer the bid I'll never get shares.  I'd rather have a position at a percent or two higher rather than have nothing in some cases.

Sure, I sometimes buy at the ask as well, but two things to consider:

 

1. If you are indeed buying something that will go up 100% saving few pennies isn't important. While I usually think that the things I buy have that kind of potential the truth is that in reality that's usually not the case. I think for most people generating 5% alpha would be an impressive result. If you incur a couple percent trading costs when you buy and sell, and your average holding period is a year than almost all your possible outperformance disappears. Saving a couple percent can be very very significant I think.

 

2. How often do you buy something that only goes up after you bought it? Usually I get an opportunity to buy it cheaper, so you don't need to be in a rush to enter your position.

 

I agree with your points, although I have had a number of opportunities with extremely illiquid stocks where the price was low, but if I didn't step up and buy in size at the ask I'd never have a chance to buy at that price again.

 

For things that trade somewhat often I agree, the price will dip lower.  For many other things the price might never get lower, I don't think Conduril's price has ever come down from my initial purchase, I've averaged up with it over time.

[Hielko]

I also bought Conduril at the ask price, and averaged up, and I do think that's a good example of when it makes sense to buy at the ask: extremely low liquidity, and a really good price. But even Conduril could have been bought cheaper, a decent block of stock changed hands at E20 share just days after I hit the ask @ E22.

[dabuff]

Does anyone sell puts instead of using limit orders to get into stocks?

[boilermaker75]

Does anyone sell puts instead of using limit orders to get into stocks?

 

Yes, that is how I enter all my positions. It is rare that I miss out because a stock never trades below my target price and I don't get put to. The one I recall was MCD at a strike price of $55 about 5 years ago.

[jawn619]

some brokers actually get you a very good price. For example when you send a market order to fidelity, you almost always get between the bid/ask and sometimes even at the bid. It depends on the liquidity of the stock but there have been plenty of times where certain brokerages have paid for their fees by just getting a really good price.

[boilermaker75]

some brokers actually get you a very good price. For example when you send a market order to fidelity, you almost always get between the bid/ask and sometimes even at the bid. It depends on the liquidity of the stock but there have been plenty of times where certain brokerages have paid for their fees by just getting a really good price.

 

I usually put my option orders in as a limit at the bid and get better pricing, especially from IB.

 

One thing to not do is put your limit order in as "all or none," because I have never gotten better than the bid when doing that. Here I am referring to my Schwab account.