What’s a Limit Order and How Do They Work?


Table of Contents:

  1. Limit order vs. market order
  2. How to use a limit order
  3. The bottom line

When investing in the stock market, it is important to understand different factors that can affect your profit and loss. More specifically, how certain order types can impact your positioning in the stock market. By taking a closer look at orders, you will see that there are different types of orders an investor can use based on their goal and the outcome they are looking to achieve. So, what is a limit order? Limit orders are types of stock trades that let you buy or sell at a set price.

Limit buy orders set the most you’re willing to pay for a stock. Limit sell orders set the minimum you’re willing to sell at. A trade may not execute if the market doesn’t align with your limit buy or sell price.

As previously mentioned, limit buy orders set the most you’re willing to pay for a stock specific price. The order will only go through if the price is the specified asking price or better. Limit orders can be broken down into two different types: buy limit orders and sell limit orders. It is important to understand that when investing in the stock market there are risks involved.

Key Takeaways:

  • What is a limit order in stock trading? The two types of limit orders are buy limit orders and sell limit orders.
  • A buy limit order is an instruction from a trader to their broker to buy a particular stock but only for a specified price (or less).
  • A sell limit order is an instruction from a trader to their broker to sell a particular stock but only at a specified price (or more).
  • An asking price is the price an investor is willing to accept for a stock. Also called the offer price, the ask quote might also include how many shares the investor wishes to sell.
  • Limit orders may not be filled.
  • A limit order allows you to set a maximum/minimum price that you are willing to buy/sell a stock for—solely focusing on controlling the price. In contrast, market order allows you to buy/sell stock at whatever the best market price and is sure to be fulfilled but you only find out the price after the trade has taken place.
  • A day limit order remains active only for the duration of the trading period and does not carry over into after-hours trading sessions. However, a good til’ canceled (also known as GTC) limit order carries over into the next trading session until it expires, executes, or you decide to cancel the order.

Buy limit order

Now that we’ve defined limit orders, questions that still may come to mind might include: what is a limit order in stocks, and how do these limit order types affect my buying decision? A buy limit order is a limit order that an investor can use to purchase stock at a specified price or below a specified price. This not only gives an investor authority over how much they want to pay, but it also controls the execution of the order, which can only be performed at the set price or below the set price.

For example, let’s say you want to purchase FHS stock for $20, so you place a buy limit order at $20, which sets the limit price. This tells the system that you are willing to buy the stock at $20 or less. However, the current market price for FHS stock is $36. This means that if the stock price for FHS decreases to $20 or below—and only then—your buy limit order will execute. However, your order for FHS stock will not execute if the price stays at $36 or goes higher.

Your buying decision is not only influenced by your goals but what order types you use to achieve your investment goals. As stated earlier, using a buy limit order allows you to have control by purchasing at a specific price or even better, paying less than your intended set price should the price of a stock fall. Some investors may use a buy limit order if they expect a certain price decrease and are looking to benefit from it. However, just as a buy limit order comes with the advantage of controlling the price, it can also serve as a disadvantage. This means that by controlling the price, you may miss out on a trade because your order cannot be filled if the price of a stock does not decrease but rather increases. Nonetheless, understanding how stocks work and how to use different order types to your advantage can set you ahead of the game.

Sell limit order

So, what is a sell limit order? A sell limit order is a limit order that an investor can use to sell stock at a specified price or above the specified price. Opposite of a buy limit order, a sell limit order allows an investor to control the selling price with how much they are willing to sell a stock for.

Let’s look at the same example, except this time for a sell limit order. Let’s say you want to sell the same FHS stock for $36, so you place a sell limit order to set your limit price at $36. However, the current market price for FHS stock is $20. If the stock price for FHS increases to meet your limit price at $36 or continues to rise above $36, your sell limit order will execute. If the price of the FHS stock does not rise to meet your limit price, your order will not get filled. The photo example below shows the difference between where to place a buy limit order and where to place a sell limit order.

When to Buy or Sell a Limit Order

Why the difference between ask and bid matters for limit orders

When trading stocks, there is a key difference between the bid and the ask, which is an important nuance for investors to understand. When a buyer makes a bid, they specify with that number how much they’re willing to pay for the stock in question.

The bid-ask spread is the gap between the highest bid price and the lowest ask price for a particular stock. The bid price is always lower than the ask price, but sometimes the spread is relatively small. For example, if the highest bid is $10/share, and the lowest ask is $10.50/share, the bid-ask spread for that security would be $.50.

Investors using limit orders to buy securities should keep in mind the difference because buy limit orders take into account the asking price. The stock’s asking price must be at the limit order price or lower for the order to be filled.

For example, if an investor is looking to buy at $11/share, the asking price must drop to $11, and there must be an offer from a seller available at that price for the order to be filled.

Limit order vs. market order

Now that we’ve covered what a limit order is, we can dive into the difference between limit orders and market orders. As discussed earlier, a stock limit order allows you to set a minimum or maximum price that you are willing to buy or sell a stock for—solely focusing on controlling the price. However, market orders focus on purchasing stock at whatever the market price and the fulfillment of the order. While a limit order focuses on price, market orders focus on quickly fulfilling the order.

For example, let’s say you want to place a market order to buy stock at Blue Company at the current market price. This means that your order will fill at whatever the current stock price is for Blue Company. This allows for your order to get filled rather quickly, which is the opposite of a limit order that would wait for the stock price to meet your limit price. In the photo example below, you will see where a market order shows up on the chart in the presence of a buy limit order and a sell limit order.

Limit Order vs. Market OrderAn important thing to consider is that limit orders usually come as they are available. This means that despite a stock meeting the limit price, a limit order has the potential of not executing due to other orders being ahead. In addition, limit orders are more complex for a brokerage to perform than market orders, which can result in higher fees than other orders. However, unlike market orders, limit orders can give you more control over unpredictable and fluctuating stock prices.

When learning how to invest in stocks, it’s important to understand the advantages and disadvantages of using market orders or a stock’s limit order. Moreover, how either can contribute to your end goal and support your decisions as an investor. Always remember, that there are risks involved when participating in the stock market.

How to use a limit order

What is a limit order in stocks? Now that we’ve answered this question let’s move on to how to use a limit order when trading. If using a limit order, you would first determine whether you are looking to buy or sell stock. Let’s take a look at the photo example from our previous example. You’re now ready to place a buy limit order for FHS stock. You decide, as previously discussed, that you only want to pay $20 for FHS stock but see that the market price for the stock is $36. You would then enter a limit order for $20, which indicates the price you are willing to purchase the stock for. If the stock price for FHS falls to $20 or below, your order will then be triggered.

How to Use a Limit OrderNow, let’s say you are ready to place a sell limit order on the same FHS stock from the previous example. You are only willing to sell for $36. However, you see that the current market price for FHS stock is $20. You would then set a limit of $36, which is what you want to sell the stock for. If the stock price for FHS increases to $36 or above, your order will get triggered. As an investor, you can also use a stop-limit order to protect your trade. A stop-limit order can help reduce risks and combines a stop order with a limit order. When an investor uses a stop-limit order, the order executes at the set limit price once the stock price meets the stop price.

When it comes to using limit orders, you can also determine the time frame that you want your order to remain active. Let’s say you are looking to keep your order active for the remainder of the day. This is called a day limit order. A day limit order remains active only for the duration of the trading period and does not carry over into after-hours trading sessions. However, if you are looking for your limit order to remain active for a longer time, you would opt for a good ’til canceled. A good til’ canceled (also known as GTC) limit order carries over into the next trading sessions until it expires, executes, or you decide to cancel the order. Understanding stock market hours will also help guide you when trading.

The bottom line

There are many moving parts when it comes to investing. However, it does not have to be overwhelming when starting out. Putting together an investment strategy that includes your short- and long-term goals can make the process easier. Also, it is important to understand how different order types and other trading factors can benefit you, maximize your profit, and present certain risks.

Limit orders are good to use in situations where you want to have more control over how much you purchase stock for and how much you are willing to sell a stock for. Limit orders are great for new investors when learning the stock market, and even for those who have more skin in the game.

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