Reviewed by Aug 27, 2020| Updated on
Introduction to a Limit Order
A limit order is a kind of an order to buy or sell a security at, or better than, a given price. The order will only be executed at the maximum price or a lower price for buy limit orders, while the order will only be executed at the limit price or higher for sale limit orders. This stipulation allows traders to monitor the rates they deal in better.
The buyer is guaranteed to pay that price, or less, by using a buy limit order. While the price is guaranteed, the order will not be completed, and limits will not be executed until and unless the security price complies with the order qualifications. In case the asset does not reach the price specified, the order is not filled out and the investor may lose a trading opportunity. This can be compared with a market order, wherein the transaction is carried out at the current market price without defining any price cap.
How Does a Limit Order Function?
A limit order is the usage of a preset price to purchase or sell a security. The investor is guaranteed to pay the purchase limit order price or better by using a purchase limit order but it is not guaranteed that the order will be filled out. A limit order provides a trader with more control over a security's execution price, particularly if they are afraid to use a market order during periods of heightened volatility.
There are different times to use a limit order such as when a stock is rising or falling very fast and a trader is afraid to get a bad fill from a market order. Furthermore, a limit order may be useful if a trader does not watch a stock and has in mind a certain price at which they will be happy to buy or sell the safe. Limit orders can be left open with an expiry date, too.
Limit Order Versus Market Order
When an investor places an order to either purchase or sell a stock, there are 2 main price-related execution options: place the order "at market" or "at limit." Market orders are transactions that are intended to execute at present or market price as quickly as possible. Conversely, a limit order decides the maximum or minimum price you are prepared to buy or sell at.
One can think of buying stocks with an analogy to buying a car. You can pay the sticker price of the dealer with a car, and get the vehicle. Or, if the dealer does not meet your price, you can negotiate a price and refuse to finalize the deal. It can be thought that the stock market would work in a similar way.
A market order deals with executing the order; the price of the security is secondary to the speed at which the trade is completed. Limit orders deal primarily with the price; if the value of the security currently rests outside the parameters set in the limit order, the transaction will not take place.