Example of Limit Orders on Thinly Traded and Penny Stocks

Buying stocks with market orders is quick and easy. The trader only needs to choose what stock and how much to buy, and places the order. The broker will make the trade at whatever the asking price is, buying as much of the stock as is requested.
This strategy is possibly acceptable when purchasing a stock that trades with high volume, such as one of the Dow 30 Index stocks. These trade millions of shares each day, and the individual investor will likely find that there are plenty of shares are available at the market price he intended to pay.

Using Limit Orders to Buy Stocks

As opposed to market orders, limit orders place a cap on the price that an investor will pay for a stock. If the investor wishes to buy 100 shares of XYZ stock, he places a limit order of $10, and the broker will not pay more than $10 for each share of XYZ. If shares are available for less than $10, the broker will execute the order at that price.

Therefore, it is possible that the investor in this case will end up with, for example, 50 shares at $9.90 and $50 at $10, but an average price of $9.95. The broker will not buy shares at a price greater than the limit price of $10.

Setting a Limit Price Below the Market Price

Because stock prices are volatile, that is, they fluctuate rapidly; limit orders are commonly used to attempt to get a lower price than the current price by creating a limit order at a price below the market price.
For example, if the market price is $20, a savvy trader may put a limit order in at $19, hoping that the price will drop to his limit price, saving a dollar per share. The risk is that the price will not drop to $19, and may increase, so that to purchase the shares he will have to pay more than $20.

Setting a Limit Price Above the Market Price for Penny Stocks

An alternate strategy for penny stocks or stocks that do not trade much each day is to set a limit price higher than the current market price, especially if buying a large number of shares.
Penny stocks are low priced stocks, not necessarily worth a penny, but usually less than a dollar, and not more than $5. Because of the low price, traders can buy large blocks of shares, often more than are available at the market price.
In this example, the trader wants to buy 10,000 shares of ABC Company, and the current market price is $2 per share. Despite the low price, the stock trades infrequently, so there is no guarantee how many shares others are willing to sell at $2.
If he puts in a market order, he may find that he has purchased 1,000 shares at $2, another 1,000 at $2.10, and there are no more sellers until the price reaches $2.50. His broker will continue to raise the bid until all 10,000 are purchased. The average price for the 10,000 shares may end up being $2.40.
A smart trader will post a limit price of $2.10. This way he can be assured of paying no more than $2.10 for any of his shares. He may not get all the shares he wants at once, but he eliminates the possibility of cleaning out all the buyers and paying a much higher price. It is more likely that given time, some other sellers may step in and lower the selling price to the $2.10 level.
Using limit orders can prevent over paying for a stock, and smart traders will use all the options at their disposal in order to make the most money on a trade.