While placing your orders at any trading terminal you must have come across various types of orders that one can place based on the type of trade a person is taking. When choosing the type of order you want to place, you come across some other terms as well such as trigger price and limit price.
In this article, we are going to discuss what trigger price and limit price are, their benefits, and their limitations.
What Is A Trigger Price?
In stock trading, a trigger price is a pre-determined price at which a buy or sell order will be executed automatically.
This can be useful for investors who want to set up an order that will be executed without requiring them to constantly monitor the market.
For example, an investor might set up a trigger price to buy a stock if it falls below a certain price or to sell a stock if it rises above a certain price.
This can help the investor to take advantage of market movements without having to constantly monitor the market themselves.
Here is an example of how a trigger price might be used:
Suppose that an investor is interested in buying shares of XYZ Company, but they think that the stock is at a very important resistance zone and he will take a position (buy) once the stock breaks the resistance zone.
The investor might set up a trigger price to buy XYZ stock if the price rises above Rs 93 per share. The investor would enter this trigger price into their trading account, along with the number of shares they want to buy and the maximum price they are willing to pay for each share.
If for an order to buy, the trigger price is 93.00, the limit price is 95.00 and the market (last trade) price is 90.00, then this order will be released into the system once when the market price reaches or exceeds 93.00.
This order will be added to the order queue at the exchange with the time of triggering as the time stamp, as a limit order to buy at Rs 95.00.
Till such time that the order is triggered, it will stay in a separate queue at the exchange which is not visible to other market participants.
Trigger prices can be used to buy or sell stocks, as well as other types of securities such as exchange-traded funds (ETFs) and options.
They can be a useful tool for investors who want to take advantage of market movements without constantly monitoring the market.
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Benefits Of Using Trigger Price
There are several benefits to using trigger prices in stock trading:
- Emotions management: Using trigger prices can help investors to manage their emotions when trading. By setting up an order in advance and letting it be executed automatically, investors can avoid the temptation to make impulsive trades based on short-term market movements or their own emotions.
- Cost savings: Using trigger prices can help investors to save on trading costs by allowing them to take advantage of the best available prices at the time their orders are executed. This can be especially useful for investors who are trading large quantities of stock or who are trying to minimize the impact of transaction costs on their returns.
- Time-saving: By automating trades, traders can save time and energy that would otherwise be spent on monitoring the markets and placing orders manually.
- Execution at the best price: By setting trigger orders traders can make sure that they are getting the best possible price at the time of execution.
Limitations Of Using Trigger Price
There are also some limitations to using trigger prices in stock trading:
- Market risk: Trigger prices do not guarantee that an order will be executed at a particular price. If the market moves quickly, the price at which an order is executed may be significantly different from the trigger price. This can be especially risky if the market is highly volatile or if the order is for a large quantity of stock.
- Order risk: If the market is very active, it is possible that an order triggered by a particular price may not be able to be completely filled at that price. This could result in only a partial fill of the order, or in the order being filled at a price that is significantly different from the trigger price.
- Platform risk: There is also the risk that there could be a problem with the brokerage platform or the investor’s account, which could prevent the trigger price from being activated or the order from being executed.
Overall, it is important for investors to carefully consider the potential risks and limitations of using trigger prices before setting them up in their trading accounts.
What Is A Limit Price?
In stock trading, a limit price is the fixed price that a trader is willing to buy or sell a stock for. When placing a buy order with a limit price, the trader is telling the broker that they are willing to pay no more than the specified limit price for the stock.
Similarly, when placing a sell order with a limit price, the trader is telling the broker that they are willing to sell the stock for no less than the specified limit price.
Limit orders can be useful for traders who want to ensure they are getting a certain price for a stock, rather than accepting whatever price the market is currently offering.
If a trader is looking to buy shares of XYZ’s stock and is willing to buy for no more than Rs 14.50, they will only buy the stock at a price of Rs 14.50.
If a trader is looking to sell shares of ABC stock and is willing to sell for no less than Rs 25, they will only sell the shares if they can be sold for Rs 25.
Benefits Of Using Limit Price
There are several benefits to using limit prices in stock trading:
- Price protection: As mentioned earlier, limit prices can help traders get the price they want for stock, rather than accepting whatever price the market is currently offering. This can be especially useful for traders trying to get a good price on a stock that is expected to rise or fall soon.
- Improved risk management: By specifying a limit price, traders can control how much they are willing to pay for a stock or how much they are willing to accept for a sale. This can help traders manage their risk and avoid overpaying for stock or selling too cheaply.
- Reduced transaction costs: Limit orders may result in fewer transactions, which can help traders save on brokerage fees and other transaction costs.
- Increased control: Limit orders give traders more control over their trades, as they can specify exactly what price they are willing to buy or sell at. This can be especially useful for traders who are trying to implement a specific trading strategy.
Limitations Of Using Limit Price
There are also some limitations to using limit prices in stock trading:
- The order may not be filled: If the market price of stock never reaches the limit price specified in an order, the order may not be filled. This means that the trader may miss out on an opportunity to buy or sell the stock.
- Does not guarantee execution: A limit order does not guarantee execution. Execution only occurs when the asset’s price trades at the limit price. The asset trading at the limit order price isn’t enough. The trader may have 100 shares posted to buy at that price, but there may be thousands of shares ahead of them also wanting to buy at that price. So, sometime he may get a partial fill for this order.
- Some brokers charge a higher commission for a limit order than for a market order. This is largely an outdated practice, though, as most brokers charge either a flat fee or no fee per order, or charge based on the number of shares traded (or dollar amount), and don’t charge based on order type.
I hope that after reading this article you have a clear understanding of trigger price and limit price and how they are used. In this article, we learned what is trigger price and limit price, their benefits, and limitations.
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