Most investors purchase and sell securities, including stocks, bonds and commodities, with the help of a broker. In the stock market, a stock broker will buy and sell securities on behalf of investors for fees and commissions. As a result, investors gain access to individual stocks or to multiple assets through mutual funds, which are baskets of securities managed by professionals. When an investor places a buy order with a broker, he or she is is giving that broker the right to purchase a stock from a stock exchange at the best possible price. There is a variation on this strategy that can increase the chances for profitability and make a buy order less risky.
Some companies allow investors to purchase shares of stock directly from that entity rather than through a broker. This is possible through dividend reinvestment programs, or DRIPs, which are company programs that can cut down on broker fees, although not all companies offer them. Most of the time, an investor needs a broker to act as a middleman between that investor and the stock exchange in which a company lists its shares.
An investor can place a buy order or request to purchase a stock with a broker via the Internet, over the telephone, in person or via fax. This request is based on the expectation that the broker will be able to obtain a particular security at the lowest price. If the stock price soars unexpectedly, a buy order could result in an expensive purchase for those shares.
To mitigate the chance that a broker will buy a stock at lofty prices through a general buy order, an investor can place a more specific buy limit order with that broker. An investor must first set a limit price, the highest value that he or she is willing to pay for a certain stock, to initiate a buy limit order. Once that stock drops to that particular price or less, the broker has the right to purchase shares on behalf of that investor.
Stocks can be volatile, however, which means they might not hold a particular price level for long before rising in value again. There is no guarantee, even after placing a buy limit order, that a broker will be able to secure a stock at a certain level. Instead, there is a promise that the broker will not purchase shares for a price that exceeds the buy limit order level established by the investor.