A limit order in financial markets is an instruction to buy or sell a stock or other security at a specified price. This provision allows traders to have more control over their trading prices. Limit orders can be placed on buy or sell orders.
Buy limit orders will only be executed at the limit price or lower.
Sell limit orders will only be executed at the limit price or higher.
The price is guaranteed, but the order is not guaranteed to be filled. A limit order will be conducted only if the price fits the order's requirements.
An alternative to a limit order is a market order, which requires the transaction to be executed at the prevailing market price without specifying any price limit.
A limit order ensures that the order will be filled at or above a certain price level. So limit orders are not guaranteed to be executed. And please note that even if the limit price is hit, there is still a possibility the order will not be executed if there are other orders ahead of yours at that price.
Limit orders control the execution price but may result in missed opportunities in rapidly changing market conditions.
Limit orders can be used with stop orders to prevent losses.
Limit orders are typically valid for a set number of days, such as 30 days, or until the order is filled or the trader cancels the order.
Therefore, there is no guarantee that the stock you want to sell or buy will reach the price you set, but a limit order prevents you from buying (or selling) above (or below) your target price.
If the stock does not reach the limit price you set by the end of the stated timeframe, the limit order will not be executed.
Limit order vs. market order
Two of the most frequent types of orders are limit and market orders. A market order directs a broker to purchase or sell a stock at the best available price. On most broker platforms, it is the default order type.
Market orders are executed immediately, but the transaction price is not guaranteed. When your market order goes through, the final price may be higher or lower than it was when you placed the order.
Assume you hope to buy Disney (DIS), which is now trading at $110 per share. When you place a market order for 10 shares of DIS, your broker will immediately purchase the stock at the best available price. You will spend more than $110 per share if the price of Disney stock rises before the order is completed.
Unlike limit orders, Market orders are guaranteed to be filled. Market orders are processed during regular trading hours. The NYSE and Nasdaq's normal trading hours are Monday through Friday from 9:30 am to 4:00 pm ET.
When you trade outside of trading hours, breaking news or other factors may cause price changes before the order is completed.
How do limit orders work?
Your broker will place a limit order for you. The limit order states the security, quantity, price, and whether you are buying or selling. The order will not be triggered until a specific expected market price is reached.
Nonetheless, execution of the limit order is not assured, particularly in extremely volatile markets or regarding highly volatile assets with little liquidity.
What is the distinction between a limit and a stop-limit order?
A limit order is a purchase or sale of securities if a certain price is met. A stop-limit order adds another layer by demanding that a particular price be reached that differs from the sale price. For example, a limit order to sell your stocks at $20 will most likely be executed when the market price hits $20.
When should you choose a limit order?
If you want to purchase or sell stocks right now, market orders are your best choice. Limit orders can be appropriate in some particular circumstances.
1. When you don't want to watch the market.
Placing a limit order can keep sentiment out of the trade. If you're afraid about selling or buying a stock at an inappropriate time, you may use a limit order to avoid having to worry about market timing.
2. When you want to lock in a better price.
Limit orders are a great option when you have a specific target price to buy or sell a stock. For example, If you believe Tesla (TSLA) will go below $680 per share, you may put a limit order to purchase the stock at $679. In this case, your order will be placed only if the stock reaches a price point of $679 or lower. If not, the order will not be executed.
3. When you are trading a lot of shares.
When you are trading a large number of stocks, limit orders might be helpful to assist you in preventing slippage or the gap between your expected price and the actual price. When you place a market order, it is difficult to predict how much slippage may occur. But with a limit order, you know exactly how much you will pay for the number of shares specified in the order, but there is a possibility the entire order may not be filled.
4. When you wish to trade stocks with low volume.
When you are trading equities with a low volume, limit orders can also be useful. For example, if you wish to purchase a stock of a business that isn't frequently traded, placing a market order may need some time to get this order filled and the price may fluctuate quite a bit. In this instance, a limit order can assist you in obtaining the desired price and trading automatically if the desired price is hit.