When purchasing or selling ETFs through a brokerage account, investors can choose among a various order types, such as a market order or a limit order. The options also apply to stop-loss orders that trigger an automatic sell when an ETF dips to a certain price. [Trading ETFs: Why Use Limit Orders]
However, investors should understand the differences between the order types. Specifically, a market order is designed to fill immediately at the best available current price and the price at which the order was placed is not guaranteed.
Consequently, once prices declined to a certain point on Monday morning, stop-loss orders were converted over to market orders to sell at the next available price. So, if someone had an open buy order at some obscenely lower price, the open market sellers would have been forced into even lower prices in what was perceived to market observers as a mini crash.
If investors took anything away from this experience, more people should utilize limit orders to help prevent a similarly unwanted run. A limit order is designed to fill at a specific price or better. A buy limit order would purchase the ETF at or below a stated price while a sell limit order will only be triggered at the stated limit price or higher.
While there is a chance that the markets could decline even further, investors should also try not to make things worse by allowing panic to dictate investment decisions. Long-term investors are better off staying patient and waiting for markets to calm.
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