For some time now I’ve been suggesting that ETF investors use limit orders—never market orders—when placing trades in their accounts. A market order will be filled (usually immediately and in full) at the best available price. A limit order allows you to specify the maximum price you’ll pay when buying, or the minimum you’ll accept when selling. But judging from some of the comments I’ve received recently, many investors are not clear on the reasons for this advice.
Some seem to believe that placing limit orders will allow them to get a “better price” than they would have obtained with a market order. But if the exchange functions the way it’s supposed to, that’s not true. Using limit orders is not like haggling with a salesman on a used car lot: you can’t get a good deal just because you drive a hard bargain.
Consider three ETF investors—Mark, Cheryl, and Barney—who want to buy 100 shares of the Vanguard Canadian Aggregate Bond (VAB). They get the following quote from their brokerage:
Because they’re placing a buy order, our three investors look at the ask price,