With the recently stressed markets, exchange traded fund investors should keep limit orders on hand to protect trades in volatile times and to better control entry and exit points.
Limit orders are trades that specifically state how many shares are bought or sold at a specific price or better. For instance, a buy limit order can purchase an ETF at or below a stated price, and a sell limit order can only be executed at the limit price or higher. Traders should also be aware that limit orders may cost more than market orders. [Protecting Your Trades]
While limit orders do not guarantee execution, ETF investors should utilize limit orders when buying or selling an investment. This way, the investor will never pay more than he or she intended.
In comparison, typical market orders would execute a buy or sell order at the best available price. This may not implement trades on prices originally quoted. During times of high market volatility, the price discrepancies are especially noticeable or in securities with low volume trades.
During times of market volatility, ETF investors can sell stops and sell stop limit orders.
In a sell-stop, or stop-loss order, a security is sold once it hits a certain price. If the ETF falls to the stop price, the order is executed and sold at the market price for the security – the stop is always placed below the stock’s market price.
A stop-limit order is where a security is sold once a specific price is reached. If the security hits the stop price, the order converts to a limit order.
Recently, market volatility has roiled the markets, and unsettled the underlying markets tracked by ETFs.
Nevertheless, “ETFs in many cases performed better than ever in allowing investors to move quickly and efficiently in and out of investment exposures,” Mark Wiedman, global head of iShares at BlackRock (NYSE: BLK), said in an open letter to investors. [ETFs Performed Well in Stressed Market: iShares]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.