"One way for investors to protect themselves from a rapid change in the price of a stock is to use a limit order rather than a market order"

Arthur Levitt emphasizes the strategy of using limitation orders over market orders to protect financiers from the volatility associated with rapid price changes in stocks. To understand this concept, it is essential to separate in between limit orders and market orders.

A market order is executed instantly at the existing market value. While this makes sure that an order is filled quickly, it exposes the investor to the threat of cost swings in extremely volatile markets. The price at which a market order is executed can considerably differ from the last-quoted price, specifically in fast-moving markets. This can result in buying at suddenly high rates or selling at all of a sudden low prices.

On the other hand, a limitation order enables the investor to set a particular rate at which they want to buy or sell a stock. The trade will only be executed if the stock's rate reaches or is more favorable than the financier's set price. This system offers a type of security by guaranteeing that trades are carried out at prices that investors deem acceptable. While a limitation order does not ensure execution-- as the marketplace might not reach the specified price-- it prevents trades at unfavorable rates, which is important during periods of high volatility.

Levitt's recommendations underscores the importance of tactical preparation in trading. Investors who make use of limitation orders can much better manage their expectations and protect their investments from unforeseeable market movements. This technique is particularly advantageous for those who have a particular cost target based upon their appraisal or investment technique.

By using limitation orders, financiers acquire more control over their trades, keep discipline against market sound, and minimize the psychological stress connected with sudden market changes. Levitt's insight thus highlights a useful danger management tool, encouraging financiers to take a proactive function in securing their portfolios against the fundamental unpredictability of the stock market.