Let’s play make-believe. Imagine you are a stock trader and you have been watching a particular commodity all day. During the course of the day you have noticed increased volume in the activity and your gut is screaming that the best price you will receive will be at the close of the market. But you don’t want to risk anything and be caught by any unpleasant surprise. A way to prevent the negative effects of an unpredictable entry price is by entering a limit-on-close order.
A limit-on-close order is an instruction to buy or sell shares near the market close only if the closing price is trading better than the limit price. This is a very handy way for preparing the unexpected, like a huge spike in price or an unexpected rapid decline in market price.
A trader may choose to take advantage of limit-on-close order for a number of reasons. It would work as follows: if the trader has entered a purchase for a limit-on-close order for 50 shares of XYZ stock at $25.90, but at the end of the day the shares traded for $25, the instructions would be processed. However, if the same instructions were posted and the stock closed at $28 at the end of the day the order wouldn’t be processed.
Simply put, a limit-on-close order are a set of instructions from an investor to a broker to buy or sell a specific amount of stock at the close of market, but only if that price is at or above a specified price. This is a way for the two parties to meet, negotiate the terms of the transaction and then leave it to the trader to do all the work. Otherwise private investors would watch the stock ticker tape feverishly and have to give up their day jobs.