Although investor sentiment plays into a stock’s price in the form of demand vs. supply, there are numerous factors that influence investor outlook. These include a company’s fundamentals, its performance history, as well as economic or geopolitical news that may impact not only that company but an entire sector.
These elements in turn can influence whether investors believe a stock will go up or down.
For investors interested in buying stock, it’s important to understand the various ingredients that can determine stock price, even though what influences a stock’s price per share can change at a moment’s notice.
Key Points
Investor sentiment, as expressed through supply and demand, is the main driver of a stock’s price.
Depending on what’s going on in the news, in the markets, as well as larger economic trends, investors may be bullish or bearish on a company or sector.
Thus, investor behavior determines stock price, based on a host of external factors, including company fundamentals.
In order to invest in stocks, investors must understand the key factors that determine stock price — which can vary from company to company, sector to sector.
Owing to market complexity, as well as ever-changing investor sentiment, there is no way to predict price movements with 100% accuracy.
7 Factors That Determine Stock Price
Beyond the basic principles of supply and demand, there are other factors that contribute to changes in stock prices. Those include investor behavior, the news cycle, company fundamentals, and more.
1. Investor Behavior
A current stock price is based on investors’ beliefs about the future success of a company. Hypothetically, if investors have reason to believe that a company will be successful in the future, they may invest in the company, causing the price of shares to increase. This is an important aspect of stock trading basics.
Similarly, if the outlook for a company is negative, investors may sell off the shares they own, causing the price to decrease.
Basically, if a few million people think that Company X is going to be successful in the near future, and that shares of Company X will see price appreciation that could lead them to buy the stock, increasing demand, which could drive up the price per share.
Emotions such as fear, panic, anxiety, greed, and hope can have a significant impact on investor behavior. This is the basis of the field of behavioral finance and understanding investor sentiment.[1] There are many different ways investors try to predict the future success of companies.
2. Company News and Data
Stock price predictions can be made based on reading stock charts and making calculations, as well as looking at news stories, fundamental analysis like reading over company earnings and reports, and other information.
News about changes in management, production, company or industry scandals, and other stories can influence investors’ view of a company, and cause share prices to change quickly.
3. World Events
Beyond news and outlooks specifically related to companies, global factors can also influence investor behavior. For instance, a presidential election, a pandemic, political unrest, or signs of a recession can create panic in the market, influencing investors to sell off stock shares in order to avoid losses, or put their money into safer investments.
Usually there is some up or down price movement in stock prices, and some stocks are more volatile than others. It’s rare for prices to completely remain static. It’s also rare for prices to drastically increase or decrease suddenly, but this is what happens during a market crash.
A market crash can happen when many investors begin to sell, creating a snowball effect where more and more investors pull their money out of the stock market. At that point, the market could plummet, resulting in losses that wouldn’t have occurred if people hadn’t sold.
4. Stock Buybacks
Another factor that can affect stock price is company buybacks of stocks. Companies will sometimes buy back their own stock from investors, thereby reducing the supply of shares available to the public. They do this in an attempt to increase stock prices.
If companies issue more shares of stock, they are increasing the supply, which can cause the price to decrease.
5. Primary and Secondary Markets
When some companies first start selling stock to the public, they hold an IPO, or initial public offering. At the time of the IPO, an initial share price is set and investors can begin to buy the stock at that price, which is considered a primary market.
After the IPO ends, the stock gets listed on stock exchanges (or secondary markets) and the price starts to fluctuate as shares get bought and sold — and supply and demand begin to play a role in share price.
When companies don’t have an IPO, their shares get bought and sold privately, in which case share price is determined between the buyer and seller.
6. Stock Valuation
The valuation of a stock is made by looking at the company’s past and projected earnings, large trades made by institutional investors, overall market trends of the S&P 500, and ratios and calculations made by analysts.
Four ratios and calculations that are used to determine the valuation of a stock are price-to-earnings (P/E) ratio, price-to-book (P/B ratio), price-to-earnings-to-growth (PEG) ratio, and dividend yield. These calculations can help investors figure out whether a stock is currently undervalued or overvalued.
7. Bid and Ask Price
A share price ultimately gets determined through the bid, ask, and sale price on stock exchanges. The bid price is the maximum amount an investor will pay for shares of a stock, while the ask price is the lowest price a seller will accept. When the two prices match up, a sale is made, and that price sets the new price per share of the stock. Ultimately it gets down to what someone is willing to pay and if a stock owner is willing to sell to them at that price.
What someone is willing to pay or sell for is determined by psychological and market factors, as discussed. If a buyer thinks the stock is undervalued at the asking price, they will buy, and vice versa. Generally the difference between the bid and ask price isn’t very large, but if a stock’s trading volume isn’t particularly large, it can be.
Companies that are a similar size or have a similar valuation can have very different share prices because the number of shares each company issues can differ greatly.
Because of different company market caps and numbers of liquid shares, the share price doesn’t reveal much about the actual value of the company, and one can’t use share prices to compare companies. However, the share price does reflect what investors currently think the stock of a company is worth.
How to Handle Changes in Stock Price
Attempting to time the market is extremely challenging because there’s no way to reliably predict market movements. For example, an investor could sell at what they think is the peak of the market, only to watch the price continue to rise.
Historically, the stock market has continued to rise over the long term, despite plenty of ups and downs along the way. Although past trends are never a guarantee of future outcomes, it’s likely that investors with a longer time horizon, who are willing to hold onto their stocks throughout up and down cycles, may eventually see positive returns.
That said, market volatility can provide opportunities to invest when the stock market is down, or sell at higher prices, especially if they were already considering buying or selling a stock.
The Takeaway
Ultimately, supply and demand drive stock prices — which is informed by market conditions, world events, and investor behavior, among other influences. Although there is no way to look into the future to predict share prices, investors tend to look at past performance, charts, and market trends to attempt to predict price movements. In general, it’s best not to try and time the market, but to focus on building a solid long-term portfolio that will grow over time.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
What are three things that determine a stock’s price?
Broadly speaking, the three main factors that drive a stock’s price are economic/market conditions, company performance, and investor sentiment. These three factors are interdependent, with one influencing the other.
Who or what controls the price of a stock?
There isn’t one sole entity that influences the price of a stock, and owing to the interplay of factors in the stock market, there is no single source of control over a stock’s price.
What makes the price of a stock go up?
There is no way to predict whether a stock’s price will rise or fall, but generally speaking investor demand is what ultimately drives up the price of a given company. But there are numerous factors that play into investor demand.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
An accredited investor must meet specific financial criteria, and have the necessary experience to be accredited. Some investments are limited to only accredited investors.
There are two major categories of accredited investors: individuals and legal entities, which can include trusts, limited liability companies, and businesses.
Businesses like banks, investment broker-dealers, insurance companies, and pension or retirement plans are common examples of accredited investors.
Further, some private investment firms may follow legal guidelines that allow only the participation of accredited investors: i.e., those who meet certain net worth or income criteria as determined by the Securities and Exchange Commission.
Key Points
Owing to the complexity and risk some investments carry, they’re only available to accredited investors, not ordinary retail investors.
An accredited investor must meet specific financial criteria in order to invest in certain products.
Generally, an accredited investor must have $200,000 in income ($300,000 if married), or $1 million in net worth, excluding their primary residence.
Accredited investors may be individuals, but can also be trusts, institutions, and other entities.
The accredited investor designation protects main street investors from undue risk, and allows some companies to skirt SEC rules.
The Accredited Investor, Defined
Many private placement investment firms — some of which may take on a high level of risk, use complicated investment products and strategies — require investors to be accredited in order to circumvent the SEC’s legal requirements.
“One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering,” according to the SEC’s Office of Investor Education and Advocacy.
When an investment is sold to the public, it is under the regulatory authority of the SEC. (For example, a mutual fund sold to retail investors falls under the purview of the SEC.) This includes certain disclosures and extensive reporting requirements to the SEC.
Accredited Investors vs. Retail Investors
Retail investors are generally individuals who invest their own money, often for retirement, but sometimes to buy stocks online. Retail investors have to meet some basic requirements when opening an investment account, but not the stringent criteria that apply to accredited investors.
Why Companies Choose Accredited Investors
Why might an investment firm choose to limit themselves to accredited investors? For one, adhering to the SEC regulations can be an expensive and labor-intensive process. In the eyes of the law, accredited investors are more sophisticated, or may have the means to take on the risk that such investment opportunities produce.
Who Qualifies as an Accredited Investor?
For individuals to qualify as accredited investors, they must prove that they have the means necessary to take the risk involved in certain investments. This can be done in one of a few ways:
First, the individual must have earned income that exceeded $200,000 (or $300,000 if married) in each of the prior two years, and reasonably expects the same for the current year.[1]
Or they must have a net worth over $1 million, either alone or with a spouse or spousal equivalent. That does not include the value of their primary residence.[1]
Other Types of Accredited Investors
On Aug. 26, 2020, the SEC updated the qualification criteria. Individuals who have Series 7, Series 65, or Series 82 licenses in good standing can now be considered accredited investors.[2]
The SEC said this was done to allow those with knowledge and expertise to invest in private investment markets even if they do not yet meet the financial qualifications.
General partners, directors, and executives with a private fund also qualify as accredited investors.
With the recent expansion of the qualification parameters, “knowledgeable employees” of the investment fund also now qualify as accredited investors.
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.
*Customer must fund their Active Invest account with at least $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.
How a Trust Can Be an Accredited Investor
For a trust to qualify as an accredited investor, assets must total more than $5 million, and the trust cannot have been formed specifically to purchase the investment.
The trust must also be directed by a “sophisticated” person — someone who the investment company reasonably believes has the requisite experience and ability to understand the risks associated with the investment.
As of the most recent changes, LLCs with assets of over $5 million may also qualify.
Alternatively, an entity can qualify as an accredited investor when all of the equity owners are individually accredited investors.
Because this reporting is not channeled through the SEC, investment companies typically collect the information necessary to confirm that a person is an accredited investor, or may require that potential customers sign off that they are accredited investors.
The Net Worth Requirement
One of the qualifications for being an accredited investor is to have a net worth of $1 million. How do you calculate your net worth?
Generally, individual net worth is calculated by taking a person’s assets and subtracting liabilities. Assets are things of value that a person owns, and liabilities are debts owed.
For example, imagine a person has the following assets: a primary residence, a checking account, a 401(k) retirement account, and a car.
They also have a mortgage loan and two student loans — those are their liabilities.
To determine their net worth, the individual would first total the value of the assets and then the liabilities, and subtract the value of the latter from the former.
That said, the SEC has a few specific rules about what is counted in a net worth calculation:
As mentioned, a primary residence is not to be included in the person’s net worth calculation.
A mortgage on a primary residence is also not to count in the net worth calculation, unless the value of the mortgage is greater than the value of the home.
If the mortgage is “under water,” then the amount of the loan that exceeds the fair market value of the home should be included.
When considering other real estate holdings with a spouse or spouse equivalent, it is not necessary that they be held under both names. For example, a property held by just one of the two parties would count.
How Can Non-Accredited Investors Invest?
You don’t need to be an accredited investor to begin building wealth for the future. There are plenty of opportunities for investors of every level to get involved and earn returns in the stock exchange.
It’s important to understand that all investments carry some amount of risk. It’s always a good idea for investors to familiarize themselves with the risks involved with their desired investments.
To start, investors can open an account at a brokerage or with an online trading platform to buy and sell securities like stocks and exchange-traded funds (ETFs).
New investors will want to be mindful of investing fees, as those will reduce any potential investment returns. This includes account fees, trading commissions, and the fees built into the funds themselves, called expense ratios.
The Takeaway
An accredited investor — a person or an entity — is qualified to invest in certain private investments like a hedge fund or a venture capital fund. Individuals must meet a high financial bar or have industry expertise to be accredited.
The rules for accredited investors can be seen as both protections for those investing, as well as advantageous for private investment firms.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
A market-on-open order (MOO) is an order to be executed at the day’s opening price. Investors typically have until two minutes before the stock market opens at 9:30am ET to submit a market-on-open order. MOO orders are used in the opening auction of a stock exchange.
While investors who subscribe to a more passive type of investing strategy may not incorporate MOO orders into their daily lives, they can be important to know about. You never know, after all, when you may want to place an order before trading commences.
Key Points
• Market-on-open orders execute at market opening, without price guarantees.
• MOOs have a higher likelihood of execution compared to limit orders.
• MOOs are useful for capturing immediate price movements.
• Risks involve volatility and potential liquidity issues.
• Limit-on-open orders may provide price protection.
What Is a Market-on-Open (MOO) Order?
Again, market-on-open orders are trades that are executed as soon as the stock market begins trading for the day. They may hit the order book before then, but do not actually go through the trading process until the market is opened. Note, too, that MOO orders are only to be executed when the market opens — they are the opposite of market-on-close, or MOC orders.
These orders are executed at the opening price during the trading day, or immediately (or soon after) the bell rings opening the market on a given day.
How Market-on-Open Orders Work
There may be different rules for different stock exchanges, but generally, the stock market operates between 9:30am ET and 4pm ET, Monday through Friday. Trades placed outside of the hours are often called after-hours trades, and those trades may be placed as market-on-open orders, which means they will execute as soon as the market opens for the next trading day.
An investor might place a market-on-open order if they anticipate big price changes occurring during the next trading day, among other reasons.
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.
*Customer must fund their Active Invest account with at least $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.
Different Order Types
To fully understand how an MOO order works, it may help to first understand both stock exchanges and the different ways that trades can be executed. The latter is generally referred to as an “order type.”
Stock exchanges are marketplaces where securities such as stocks and ETFs are bought and sold. In the U.S., there are more than a dozen stock exchanges registered with the Securities and Exchange Commission (SEC), including the New York Stock Exchange and Nasdaq Stock Exchange.
Next, market order types. Order types can be put into one of two broad categories: market orders and limit orders.
Market Order
A market order is an order to buy or sell at the best available price at the time. Generally, a market order focuses on speed and will be executed as close to immediately as possible.
But securities that trade on an exchange experience market fluctuations throughout the day, so the investor may end up with a price that is higher or lower than the last-quoted price. Therefore, a market-on-open order is a specific version of a market order.
Because it is a market order, it will happen as close to immediately as possible and at the open of the market. The order will be filled no matter the opening price of investment. There is no guarantee on the price level.
With each order type, the investor is providing specific information on how, and under what circumstances, they would like the order filled. In the world of order types, these are semi-customizable orders with modifications.
Limit Order
A limit order is an order to buy or sell a stock at a specific price. A limit order is triggered at the limit price or within $0.25 of it. At the next price, the buy or sell will be executed.
Therefore, limit orders can be made at a designated price, or very close to it. While limit orders do not guarantee execution, they may help ensure that an investor does not pay more than they can (or want to) afford for a particular security.
For example, an investor can indicate that they only want to buy a stock if it hits or drops below $50. If the stock’s price doesn’t reach $50, the order is not filled.
After-Hours Trading
An MOO order is not to be confused with after-hours trading and early-hours trading. Some brokerage firms are able to execute trades for investors during the hours immediately following the market closing or prior to the market’s open.
3 Reasons to Use a Market-On-Open Orders
There are several reasons to use a market-on-open order, including the following.
Trading Outside of Operating Hours
Stock exchanges aren’t always open. The New York Stock Exchange (NYSE) and the Nasdaq Stock Exchange are both open between 9:30 am and 4:00 pm EST.
Anticipating Changes in Value
Traders and investors may use a market-on-open order when they foresee a good buying or selling opportunity at the open of the market. For example, traders may expect price movement in a stock if significant news is released about a company after the market closes. They may want to cash out stocks, and do so using a market-on-open order.
The News Cycle
Good news, such as a company exceeding their earnings expectations, may lead to an increase in the price of that stock. Bad news, such as missing earnings estimates, may lead to a decline in the stock price. Some traders and investors may also watch the after-hours market and decide to place an MOO order in response to what they see.
It’s also important to know that stock exchanges tend to experience the most volume or trades at the open and right before the close. Even though the stock market is open from 9:30am to 4:00pm, many investors concentrate their trading at the beginning and near the end of the trading day in order to take advantage of all the liquidity, or ease of trading.
Examples of MOO Trade
Let’s look at some hypothetical examples of why an MOO order might be useful:
Example 1
Say that news breaks late in the evening regarding a large scandal within a company. The company’s stock has been trading lower in the after-hours market. An investor could look at this scenario and believe that the stock is going to continue to fall throughout the next trading day and into the foreseeable future. They enter an MOO order to sell their holding as soon as the market is open for trading.
Example 2
Or maybe a company quarterly earnings at 7am on a trading day. The report is positive and the investor believes the stock will rise rapidly once the market opens. With an MOO order, the investor can buy shares at whatever the price may be at the open.
Example 3
Though this won’t apply to the average individual investor, MOO orders may also be used by the brokerage firms to fix errors from the previous trading day. A MOO order may be used to rectify the error as early as possible on the following day.
Risks of Market-on-Open Orders
It is important to understand that if a MOO order is entered, the investor receives the opening price of the stock, which may be different from the price at the previous close.
Volatility at the Open
Considering the unpredictable and inherent volatility of the stock market, the price could be a little bit different — or it could be very different. Investors that use MOO orders to try and time the market may be sorely disappointed in their own ability to do so, but only because timing the market is exceedingly difficult.
Most investors will likely want to avoid trying to weave in and out of the market in the short-term and stick with a long-term plan. Some investors may use MOO orders with the intention of taking advantage of price swings, but the variability of the market could trip up a new investor.
Because the order could be filled at a price that is significantly different than anticipated, this may create the problem of not having enough cash available to cover a trade.
Using Limit-on-Open Orders
An alternative option is to use a limit-on-open order, which is like an MOO order, but it will only be filled at a predetermined price. Limit-on-market orders ensure that a transaction only goes through at a certain price point or “better.” As discussed, there are other types of limit orders out there, too, for given situations. For instance, there may be a context in which it’s best to use a stop loss order, rather than a limit-on-open or similar type of order.
The downside of doing a limit-on-market order is that there is a chance that the order doesn’t get filled.
Liquidity Issues
With an MOO order, there could also be a problem of limited liquidity. Liquidity describes the degree to which a security, like a stock or an ETF, can be quickly bought or sold.
As mentioned, there tends to be greater liquidity at the beginning of the day and at the end, and investors will generally not have a problem trading the stocks of large companies, because they have many active investors and are very liquid.
But smaller companies can be less liquid assets, making them slightly trickier to trade. In the event that there is not enough liquidity for a trade, the order may not be filled, or may be filled at a price that is very different than anticipated.
💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.
Creating a Market-on-Open Order
Creating a market-on-open order is fairly simple, but may vary from trading platform to trading platform. Generally speaking, though, a trader or investor would select an option to execute a MOO when filling out the details of a trade they wish to make.
For instance, if you wanted to sell 5 shares of Company A, you’d dictate the quantity of stock you’re trying to sell, and then choose an order type — at this point, you’d select a market-on-open order from what is likely a list of choices. Again, the specifics will depend on the individual platform you’re using, but this is generally how a MOO is created.
The Takeaway
Market-on-open orders are submitted by investors when they want their order executed at the opening price and be part of the morning auction. An investor may use this order if they want to capture a stock’s price move up or down as soon as the trading day starts.
However, MOO orders don’t guarantee any price levels, so it may be risky for an investor if shares don’t move in the direction they were expecting. Unlike limit orders though, they are more likely to get executed.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.
FAQ
What is a market-on-open order?
Market-on-open (MOO) orders are stock trading orders made outside of normal market hours and fulfilled when the markets open. Trades execute as soon as the market opens.
What is a market-on-open limit on open?
A limit-on-open order, or LOO, is a specific form of limit order that executes a trade to either buy or sell securities when the market opens, given certain conditions are met. Usually, those conditions concern a security’s value.
What is the difference between market-on-close and market-on-open?
As the name implies, market-on-close orders are executed when the market closes at 4 pm ET, Monday through Friday (excluding holidays). Conversely, market-on-open orders are executed when the market opens at 9:30am ET, Monday through Friday.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Magic Formula investing is a rules-based investing strategy developed by hedge fund manager and professor Joel Greenblatt. First outlined in his book, The Little Book That Beats the Market, the magic formula investing strategy takes a simplified approach to choosing investments.
Magic Formula Investing draws on principles of value investing to create portfolios that seek to outperform the market. For interested investors, knowing the ins and outs of the strategy before applying it is important.
Key Points
• Magic Formula Investing is a strategy developed by Joel Greenblatt, focusing on good companies at attractive prices.
• Stocks are screened using earnings yield and return on capital as primary criteria.
• The strategy notes that selecting 20 to 30 top-ranked companies, may help build a diversified portfolio.
• Magic Formula suggests a holding period for stocks is 12 months to help increase potential after-tax returns.
• Limitations include exclusion of foreign, financial, and utility companies, with no guaranteed positive returns.
What Is Magic Formula Investing?
At its core, Greenblatt’s Magic Formula Investing strategy focuses on finding good companies to invest in that are trading at attractive prices. Specifically, this strategy focuses on two things: Stock price, and the cost of capital.
The Magic Formula provides a way to help investors find or pinpoint companies that they deem undervalued by the market, and that may potentially offer a high return on their invested capital. It shares some similarities with value investing, which emphasizes finding the “hidden gems” that trade below their intrinsic value.
Value investors often follow a buy-and-hold strategy, in which securities are purchased with the intent to hold them long-term. The idea is that even though the market may have undervalued a company, it could grow in value over time and result in higher returns once an investor decides to sell.
This strategy utilizes fundamental analysis, which involves looking at things like revenue and earnings, and calculating return on equity to measure a company’s financial health.
The difference between a buy and hold strategy and Magic Formula Investing is that fundamental analysis doesn’t come into play. Instead, the formula relies on Greenblatt’s stock-screening method to identify the most promising stocks to invest in.
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, an investment platform you choose should offer the features that you need to manage your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
What Is the Magic Investing Formula?
Screening stocks using the Magic Formula method is based on a rankings system. As developed by Greenblatt, this system uses three distinct criteria to rank companies:
This is one way to measure a company’s profitability. This figure represents the net income of a company before income tax expense and interest expenses are deducted. To calculate a company’s EBIT, you’d subtract income tax expense and interest expenses from its revenue.
Earnings Per Share (EPS)
EPS is another measure of profitability, though it’s calculated differently than EBIT. With EPS, you divide a company’s net profit by the total number of common shares of stock it has outstanding. This is also a way to measure a company’s value, since EPS can tell you roughly how much money it makes per share of stock. A higher EPS may suggest higher value and a willingness for investors to pay more for shares of a company’s stock.
Return on Capital
Return on capital measures how well a company is able to allocate its capital to investments that are profitable. To figure out this number, you’d subtract dividends from net income, then divide that by the sum total of the company’s debt and equity.
By applying EBIT, EPS, and return on capital, the Magic Formula method is intended to determine quality companies at an attractive price.
How Magic Formula Investing Works
For investors interested in using the Magic Formula to help build a portfolio, there’s a specific sequence of steps to follow that Greenblatt outlines.
1. Set a Market Capitalization Threshold
Market capitalization (commonly known as market cap) represents the current number of shares of stock a company has outstanding multiplied by the price per share. Companies can be categorized as small-cap, mid-cap or large-cap, based on their market capitalization.
Engaging in Magic Formula Investing, an investor will typically start by excluding any companies with a market capitalization below $100 million. But one could set this number higher or lower, depending on personal preferences. Greenblatt advocates setting the threshold at $1 billion (which means large-cap) to help minimize volatility.
2. Exclude Certain Securities
In Magic Formula Investing, an investor next should eliminate several categories of investments. Those include stocks in the financials and utilities sectors, as well as foreign companies and American Depositary Receipts (ADRs). An ADR offers a way to indirectly own foreign companies that aren’t traded on U.S. stock exchanges.
3. Make the Necessary Calculations
Once an investor has narrowed down their list of companies, they can start running the numbers. Specifically, this means calculating:
• Earnings before interest and taxes (EBIT)
• Earnings yield (EBIT divided by enterprise value, which is a company’s total value as measured by its market capitalization plus total debt minus its cash assets)
• Return on capital (EBIT divided by the sum total of net fixed assets and working capital)
4. Create Your Rankings
After doing the above math, an investor can move on to ranking companies according to the Magic Formula — from highest earnings yield and highest return on capital to lowest. From this point on, one would focus on the top 20 to 30 companies when choosing how to invest.
5. Start Building Your Portfolio
Greenblatt suggests buying the stocks that rank in that top 20-30 list on a rolling basis. For instance, an investor may consider buying two to three positions per month for one year, eventually owning 24 to 36 of the top ranking companies. According to Greenblatt’s formula, owning at least 20 different companies will help to maintain diversification.
At the end of the 12-month period, the Magic Formula dictates that investors would sell off the losing stocks and the winners, being mindful of capital gains taxes rules. Then they’d start the cycle over again, using the Magic Formula rules to select a new crop of stocks to invest in.
Holding stocks for a year before selling at a gain or loss is intended to help maximize potential after-tax returns. When you sell stocks at a profit that you’ve held longer than one year you’d be subject to the more favorable long-term capital gains tax rate.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
Magic Formula Investing Results
Any time one is considering an investment strategy, it’s important to understand how it works and how it aligns with your goals and risk tolerance. Greenblatt’s approach is intended to help investors choose companies whose performance can potentially beat the market. Magic Formula is considered to be a tool for long-term investors seeking a disciplined, value-oriented strategy and has historically demonstrated strong outperformance of markets such as the S&P 500.
There’s no guarantee, however, that investors will see a positive return utilizing the strategy for any given year and, as with any investing strategy, there is also the risk of seeing losses.
Whether investors can replicate those Magic Formula Investing results for themselves can depend on different variables. For example, an individual portfolio may produce a very different return profile if an investor adjusts the market capitalization threshold up or down. Or if a company has an above-average year for revenue and profits, that could affect how the ranking calculations shake out.
Pros and Cons of Magic Formula Investing
The main idea behind the Magic Formula method is that it may be an option for even beginner investors to use. The idea is that by following the formula, an investor can eliminate some of the noise when making investment decisions.
That includes not giving in to investment biases that could prompt an investor to buy or sell at the wrong time. By focusing on the rankings and sticking with a one-year rolling schedule of buying and then selling, an investor can potentially remove their emotions from the equation. This can help avoid selling off stocks in a panic if the market becomes more volatile.
Downsides of Magic Formula Investing
While this formula can help an investor create a diversified portfolio, it’s still exclusionary in that it doesn’t include investing in foreign companies or companies in the financials and utilities sectors.
Beyond that, there’s no certainty that an investor will see positive results in the form of above-average returns — as noted. Greenblatt himself says that there’s nothing “magical” about the formula and that it shouldn’t be considered a guarantee of investment returns or performance. As with any investing strategy, it isn’t foolproof.
Finally, the Magic Formula Investing strategy is meant to be a long-term one. For investors more interested in seeing quick results versus adopting a buy and hold mindset, day trading might be an option to consider, though it is higher-risk.
The Takeaway
Hedge fund manager and professor Joel Greenblatt devised his Magic Formula Investing strategy as a way to invest in a curated group of good companies with high potential for returns. The system ranks companies according to three criteria: earnings before interest and taxes (EBIT), earnings per share, and return on capital. The system is intended for anyone from first-time investors to more seasoned investors.
But as with any investment strategy, there is no guarantee that the magic formula investing results will be positive every time. There is a potential for both gains and losses.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.
FAQ
What is the Magic Formula Investing strategy’s formula?
Magic Formula Investing is a strategy to choose specific stocks, and it utilizes a ranking system, developed by Joel Greenblatt, that uses three distinct criteria to rank companies: Earnings before interest and taxes (EBIT), earnings per share, and return on capital.
What returns does the Magic Formula Investing method supply?
The Magic Formula was designed to help investors outperform the market over a long period of time. But depending on the specifics of an investor’s portfolio, returns can vary wildly, and it’s possible the strategy could lead to losses as well.
What is the “magic” in Magic Formula Investing?
Magic Formula Investing is a stock-screening method used to identify companies that might be undervalued. Unfortunately, there is no magic in the formula or strategy, and there’s no guarantee that it will yield returns for investors.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Limit orders are a type of market order that gives investors the opportunity to trade stocks or other securities at a specified price. Doing so allows traders or investors to garner some form of price protection — it allows them to sell only at a price at which they won’t take a loss, or purchase securities at a price they’re comfortable with.
Limit orders can be used as a part of a broader investment or trading strategy, but can be fairly advanced for some investors.
Key Points
• Limit orders allow investors to buy or sell securities at a specific price or better, ensuring price protection.
• Buy limit orders set a maximum price; sell limit orders set a minimum price.
• Advantages of limit orders include price protection, convenience, and reduced risk of emotional trading.
• Disadvantages involve the risk of non-execution and missing out on better prices.
• Stop-limit orders combine stop and limit features, offering additional control over trade execution.
Limit Order Defined
As noted, a limit order allows investors to buy or sell securities at a price they specify or better, providing some price protection on trades.
When you set a buy limit order, for example, the trade will only be executed at that price or lower. For sell limit orders, the order will be executed at the price you set or higher. By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.
How Do Limit Orders Work?
In the simplest terms, limit orders work as a sort of restriction that an investor can choose (to either buy or sell) with “limits” on a minimum or maximum price. An investor places an order to buy a stock at a minimum price, for instance, or places an order to sell at a maximum price, in an effort to seek returns, while limiting losses.
There are two types of limit orders investors can execute: buy limit orders and limit sell orders. An important thing to know is that while a limit order specifies a desired price, it doesn’t guarantee the trade will occur at that price — or at all.
When you set a limit order, the trade will only be executed if and when the security meets the terms of the order — which may or may not happen, depending on the overall market conditions. So, when an investor sets a limit order, it’s possible to miss out on other investing opportunities.
Types of Limit Orders
As mentioned, there are two types of limit orders investors can execute: buy limit orders and limit sell orders. But there’s another, a sort of combination of the two, to be aware of.
1. Buy Limit Order
For buy limit orders, you’re essentially setting a ceiling for the trade — i.e., the highest price you’d be willing to pay for each share. If a trader places a buy limit order, the intention is to buy shares of stock. The order will be triggered when the stock hits the limit price or lower.
For example, you may want to buy shares of XYZ stock at $15 each. You could place a buy limit order that would allow the trade to be carried out automatically if the stock reaches that purchase price or better.
2. Sell Limit Order
For sell limit orders, you’re setting a price floor — i.e., the lowest amount you’d be willing to accept per share. If a trader places a limit order to sell, the order will be triggered when the stock hits the limit price or higher. So you could set a sell limit order to sell XYZ stock once its share price hits $20 or higher.
3. Stop-Limit Order
A stop-limit order is a combination of a stop order and a limit order. Stop-limit orders involve setting two prices. For example: A stock is currently priced at $30 and a trader believes it’s going to go up in value, so they set a buy stop order of $33.
When the stock hits $33, a market order to buy will be triggered. But with a stop-limit order, the trader can also set a limit price, meaning the highest price they’re willing to pay per share — say, $35 per share. Using a stop-limit order gives traders an additional level of control when they’re executing a strategy.
Stop-limit orders can also help traders make sure they sell stocks before they go down significantly in value. Let’s say a trader purchased stock XYZ at $40 per share, and now anticipates the price will drop. The trader doesn’t want to lose more than $5 per share, so they set a stop order for $35.
If the stock hits $35 — the stop price — the stock will be triggered to sell. However, the price could continue to drop before the trade is fully executed. To prevent selling at a much lower price than $35, the trader can set a limit order to only sell between $32 and $35.
How to Set a Limit Order
When placing a limit order with your brokerage firm, the broker or trading platform might ask for the following information:
• The stock or security
• Is it a buy or sell order
• Number of shares to buy or sell
• Stock order type (limit order, market order, or another type of order)
• Price
When setting up a limit order, the trader can set it to remain open indefinitely, (until the stock reaches the limit price), or they can set an expiration date.
Limit Order Example
Here’s an example of how a limit order might work: Say a trader would like to purchase 100 shares of stock XYZ. The highest price they want to pay per share is $26.75. They would set up a limit buy order like this:
Buy 100 shares XYZ limit 26.75.
As noted above, the main upside of using limit orders is that traders get to name a desired price; they generally end up paying a price they expect; and they can set an order to execute a trade that can be executed even if they are doing other things.
In this way, setting limit orders can help traders seize opportunities they might otherwise miss because limit orders can stay open for months or in some cases indefinitely (the industry term is “good ‘til canceled,’ or GTC). The limit order will still execute the trade once the terms are met.
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.
*Customer must fund their Active Invest account with at least $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.
When a Trader Might Use a Limit Order
There are several reasons why a trader or investor might want to use a limit order.
• Price protection. When a stock is experiencing volatility, you may not want to risk placing a market order and getting a bad price. Although it’s unlikely that the price will change drastically within a few seconds or minutes after placing an order, it can happen, and setting a limit order can set a floor or a ceiling for the price you want.
• Convenience. Another occasion to use a limit order might be when you’re interested in buying or selling a stock, but you don’t want to keep a constant eye on the price. By setting a limit order, you can walk away and wait for it to be executed. This might also be a good choice for longer-term positions, since in some cases traders can place a limit order with no expiration date.
• Volatility. Third, an investor may choose to set a limit order if they are buying or selling at the end of the market day or after the stock market has closed. Company or world news could be announced while the market is closed, which could affect the stock’s price when the market reopens. If the investor isn’t able to cancel a market order while the market is still closed, they may not be happy with the results of the trade. A limit order can help prevent that.
Limit orders can also be useful when the stock being traded doesn’t have a lot of liquidity. If there aren’t many people trading the stock, one order could affect the price. When entering a market order, that trade could cause the price to go up or down significantly, and a trader could end up with a different price than intended.
Pros and Cons of Using Limit Orders
Each type of order has pros and cons depending on the particular situation.
Pros of Limit Orders
Some advantages of limit orders include naming your price, and taking a set-it-and-forget-it approach.
• The trader gets to name their price. One of the chief reasons traders rely on limit orders is to set baselines for profits and losses. They won’t end up paying a price they didn’t expect when they buy or get a price below their target when it’s time to sell.
• The trader can set the order and walk away. Day trading can be time-consuming, and it requires a significant amount of knowledge. Investors who use limit orders don’t have to continuously watch the market to get the price they want.
• Insulate against volatility. Volatility can cause you to make emotional decisions. Limit orders can give traders more control over their portfolio and ward off panic-buying or selling.
• Ride the gaps. Stock prices can fluctuate overnight due to after-hours trading. It’s possible to benefit from price differences from one day to another when using limit orders.
For example, if a trader places a buy limit order for a stock at $3.50, but the order doesn’t get triggered while the market is open, the price could change overnight. If the market opens at $3.30 the next morning, they’ll get a better price, since the buy limit order gets triggered if the stock is at or below the specified price.
Cons of Limit Orders
Conversely, limit orders can have some disadvantages.
• The order may never be executed. There may not be enough supply or demand to fulfill the order even if it reaches the limit price, since there could be hundreds or even thousands of other traders wanting to buy or sell at the specified price.
• The stock may never reach the limit price. For example, if a stock is currently priced at $20, a trader might set a limit order to buy at $15. If the stock goes down to $16 and then back up to $20, the order won’t execute. In this case, they would miss out on potential gains.
• The market can change significantly. If a trader sets a shorter-term limit order, they might miss out on a better price. For example, if a stock a trader owns is currently priced at $150, the trader may choose to set a sell limit order at $154 within four weeks. If the company then makes a big announcement about a new product after that period, and the stock’s price spikes to $170, the trader would miss out on selling at that higher price.
• It takes experience to understand the market and set limit orders. New investors can miss out on opportunities and experience unwanted losses, as with any type of investment.
Limit Order vs Market Order
Limit orders differ from market orders, which are, essentially, orders to buy a security immediately at its given price. These are the most common types of orders. So, while a market order is executed immediately regardless of terms, limit orders only execute under certain circumstances.
Limit orders can also be set for pre-market and after-hours trading sessions. Market orders, by contrast, are limited to standard trading hours (9:30am to 4pm ET).
Remember: Even though limit orders are geared to a specific price, that price isn’t guaranteed. First, limit orders are generally executed on a first-come-first-served basis. So there may be orders ahead of yours that eliminate the availability of shares at your limit price.
And it bears repeating: There is also the potential for missed opportunities: The limit order you set could trigger a trade. But then the stock or other security might hit an even better price.
In other words, time is a factor. In today’s market, computer algorithms execute the majority of stock market trades. In this high-tech trading environment, it can be hard as an individual trader to know when to buy and sell. By using certain types of orders, like limit orders, traders can potentially limit their losses, lock in gains, and avoid swings in the market.
Though limit orders are commonly used as a part of day trading strategies, they can be useful for any investor who wants some price protection around their trades. For example, if you think a stock is currently undervalued, you could purchase it at the current market price, then set a sell limit order to automatically sell it when the price goes up. Again, the limit order can stay open until the security meets your desired price — or you cancel the order.
If you’re trying to parse out when a market order or a limit order is the best tool to use, consider the following.
A trader might want to use a market order if:
• Executing the trade immediately is a priority
• The stock is highly liquid
• They’re only trading a small number of shares
• The stock has a narrow bid-ask spread (about a penny)
A trader might want to use a limit order if:
• They want to specify their price
• They are trading an illiquid stock
• They want to set a long-term trade (or even walk away for their lunch break and still have the trade execute)
• They feel a stock is currently over- or undervalued
• The stock has a large bid-ask spread
• They are trading a larger number of shares
Limit Orders vs Stop Orders
There is another type of order that can come into play when you’re trying to control the price of a trade: a stop order. A stop order is similar to a limit order in that you set your desired price for a stock, say, and once the stock hits that price or goes past it, a market order is triggered to execute the purchase or sale.
The terms of a limit order are different in that a trade will be executed if the stock hits the specified price or better. So if you want to sell XYZ stock for $50 a share, a sell limit order will be triggered once the stock hits $50 or higher.
A stop order triggers a market order once XYZ stock hits $50, period. By the time the order is executed, the actual stock price could be higher or lower.
Thus with a stop order there’s also no guarantee that you’ll get the specified price. A market order is submitted once the stop price is hit, but in fast-moving markets, the actual price you pay might end up being higher or lower.
Stop orders are generally used to exit a position and to minimize losses, whereas limit orders are used to capture gains. But two can also be used in conjunction with each other with something called a stop-limit order.
What Happens If a Limit Order Is Not Filled?
A limit order can only be filled if the stock’s price reaches the limit price or better. If this doesn’t happen, then the order is not executed, and it expires according to the terms of the contract. An order can be good just for a single trading day, for a certain period of time, or in some cases it’s possible to leave the limit order open-ended using a GTC (good ‘til canceled) provision.
So if you placed a buy limit order, but the stock does not reach the specified price or lower, the purchase would not be completed and the order would expire within the specified time frame.
And if you’re using a sell limit order, but the security never reaches the specified sell price or higher, the shares would remain in your trading account and the order would expire.
Limit Orders and Price Gaps
Price gaps can occur when stocks close at one price then open at a different price on the next trading day. This can be attributed to after-market or pre-market trading that occurs after the regular market hours have ended. After-hours trading can impact stock price minimally or more substantially, depending on what’s spurring trades.
For example, say news of a large tech company’s planned merger with another tech giant leaks after hours. That could send the aftermarket trading markets into a frenzy, resulting in a radically different price for both companies’ stocks when the market reopens. Pricing gaps don’t necessarily have to be wide, but large pricing swings are possible with overnight trading.
Limit orders can help to downplay the potential for losses associated with pricing gaps. Placing a buy limit order or limit sell order may not close the gap entirely. But it may help to mitigate the losses you may experience when gaps in pricing exist. Whether the gap is moving up or down can determine what type of limit order to place and where to cap your limit price.
Advanced Strategies for Using Limit Orders
Seasoned investors may utilize more advanced strategies with limit orders. But note that it takes some practice and a solid understanding of what you’re doing to ensure you’re not taking undue risk.
Combining Limit Orders With Technical Analysis
Utilizing technical analysis strategies — which involve analyzing chart movements to try and get a sense of what a stock might do next — is one advanced strategy that investors can utilize. It’s fairly advanced, and requires some homework and analysis skills, but paired with limit orders, it may be a way for investors to incorporate new methods into their overall strategy.
Again, though: This is advanced, and doesn’t guarantee results.
Setting Conditional Limit Orders
Investors may also want to look at the possibility of using conditional limit orders to fine-tune their strategy. Conditional limit orders allow investors to set order “triggers” based on price movements, and there are several types: Contingent, one-triggers-the other, one-cancels-the-other, and one-triggers-a-one-cancels-the-other. So, they all sort of relate and can rely on each other.
The Takeaway
Limit orders can be an effective and efficient way for investors to set price caps on their trades, and also give them some protection against market swings. Limit orders offer other advantages as well, including giving traders the ability to place longer- or shorter-term trades that will be executed even if they’re not continuously watching the market. This can potentially protect investors against losses and potentially lock in gains.
That said, limit orders are complicated because they don’t guarantee that the trade will be executed at the set price. The stock (or other security) could hit the limit price — and there might not be enough supply or demand to complete the trade. There is also the potential for some missed opportunities, if the price you set triggers a trade, and subsequently the stock or other security hits an even better price.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.
FAQ
Can I specify the price for a limit order?
Yes, investors can specify the price for a limit order. In fact, the price typically is the limit in a limit order, representing either a price ceiling or a price floor.
How long does a limit order stay active?
Generally, a limit order will stay active indefinitely, unless an investor cancels it or specifies otherwise. That means that if the limit is never reached, the order will not execute, and the limit order will remain active until the limit is reached.
Can I cancel a limit order once it’s placed?
Investors can cancel standing limit orders as long as conditions haven’t arrived that have led to the order being actively executed. The cancellation process will depend on the specific exchange an investor is using, however.
What happens if the market price doesn’t reach my limit price?
If the market price of a stock does not reach the limit price — either a price floor or price ceiling — then the limit order will not execute, and the limit order will remain active until it does.
Can I place a limit order outside of regular trading hours?
It’s possible to place limit orders outside of regular trading hours, depending on the rules of a given exchange, and what market conditions dictate. The order itself, of course, won’t execute until the market opens, assuming that the limit is reached.
Are there any fees associated with limit orders?
There may or may not be fees associated with limit orders, and it’ll depend on the specific exchange or brokerage an investor is using. Note that some brokerages may charge higher fees for limit orders than market orders — but some may charge no fees at all.
Are limit orders guaranteed to be executed?
No, there is no guarantee that a limit order will be executed, as it will only execute if the limit price is reached. If the limit is not reached, the order will remain active but not execute.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
