How to decide on limits when purchasing/selling stocks?

Question

Situation: I've just inherited X$, which I'd like to invest in my favorite stock. I got the money right now in my checking account, every day that passes without it being invested is a waste. Also, suppose that I'm not too knowledgeable about the specifics of the different stocks, and my investment strategy is "put every spare coin you have into an index fund, whenever you have coin to spare".

My question is how should I decide on the stock rate limit? Suppose the stock is going at 1000 $ per share. What I usually do is invent some percentage, say 1%, and then attempt to buy the stock at maximum 1% over the current price. My reasoning is that I really just want to transfer my cash to stocks now.

My problem is that the dependence on that arbitrary number that I make up. Let's say the stock goes up by 2% the day I attempt to buy it, and I fail to buy it. Now I'll be left with the same problem tomorrow, only my cash will buy me 2% less of the stock - perhaps if I was willing to pay 1.5% above the stock price I would have saved me the trouble. How should I decide this limit?

The same applies when selling stocks, obviously.

Answer 1

You said your strategy was to put it into a index fund. But then you asked about setting stock limits. I'm confused.

Funds usually trade at their price at the end of the day, so you shouldn't try to time this at all. Just place your order.

If you are buying ETFs, there is going to be so much volume on the market that your small trade is going to have no impact on the price.

You should just place a market order.

A market order is an order to buy or sell a stock at the current market price.

A limit order is an order to buy or sell a security at a specific price.

In the US, when you place a trade with any broker, you can either place a limit order or a market order. A market order just fills your order with the next best sellers in line. If you place an order for 100 shares, the sellers willing to sell 100 shares at the lowest price will be matched with your order (sometimes you may get 50 shares at one price and 50 shares at a slightly different price). If your stock has a lot of volatility and you place a market order for a small amount of shares, you will get the best price.

If you place a limit order, you specify the price at which you want to buy shares. Your order will then only be filled with sellers willing to sell at that price or lower (i.e. they must be at least as good as you specified). This means you could place an order at a limit that does not get filled (the stock could move in a direction away from your limit price). If you really want to own the stock, you shouldn't use a limit order. You shouldn't only use a limit order if you want to tell your broker "I will only buy this stock at this price or better."

p.s. Every day that passes is NOT a waste. It's just a day that you've decided investing in cash is safer than investing in the market.