Using Limit Orders

When it comes to placing an order to buy or sell a security, you must always place a limit price to buy or sell at.  For low volume stocks such as penny stocks in the USA or stocks listed on the TSX Venture Exchange, limits are a must to make sure you, the trader, do not get ripped off.

Brokers may send your order to one of many clearing-houses which may not offer you the best price available.  Therefore, when you place a market order to sell or buy 1000 shares for $1, you may end up buying or selling the stock with a $1 premium.  Therefore, you either sell 1000 shares for $999 or buy 1000 shares for $1001.  From that, the broker get a kickback from the clearing-house.

This kickback which can be a penny, more or less, from one client is a thank-you for bringing us the business.  Therefore, from the perspective of a trader who placed a limit order, as long as the trade goes through at a limit price set by the trader, the extra kickback is meaningless.  If the kickback is due from a margin call or market order, that can cause an uproar if enough traders voice their displeasure.

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