Definition
A limit order is an order to buy or sell a security at a specific price or better. For buy limit orders, this means the order will only be executed at the limit price or lower, while for sell limit orders, the trade will occur at the limit price or higher. Limit orders are used to enter or exit a position at a specified, favorable price.
Examples
Buy Limit Order: An investor wants to purchase shares of XYZ Corporation but only if the price drops to $50 or below. The buy limit order ensures that they do not pay more than $50 per share.
Sell Limit Order: An investor wishes to sell shares of XYZ Corporation but only if the price reaches $75 or higher. The sell limit order ensures that the shares are not sold for less than $75.
Frequently Asked Questions (FAQs)
What is the main advantage of a limit order?
The main advantage is price certainty. The trader can specify the price at which they are willing to buy or sell, ensuring they do not trade at a less favorable price.
Are limit orders guaranteed to be executed?
No, limit orders are not guaranteed to be executed. If the market price never reaches the limit price, the order will remain unfulfilled.
How long do limit orders last?
Limit orders can be set to expire at the end of the trading day (Good for Day) or can remain active until canceled (Good ‘Til Cancelled).
Can a limit order be partially filled?
Yes, a limit order can be partially filled if only a portion of the order can be executed at the limit price or better.
Is a limit order the same as a stop order?
No, a limit order requires the trade to be executed at a specific price or better, whereas a stop order is activated when the market reaches a specified stop price and becomes a market order.
Related Terms
Market Order
A market order is an order to buy or sell immediately at the best available current price, offering speed but no price guarantee.
Stop Order
A stop order is an order to buy or sell a security once it reaches a specified price, known as the stop price. Once triggered, it becomes a market order.
Stop-Limit Order
A stop-limit order combines the features of a stop order and a limit order, activating the limit order once the stop price is reached.
Online References
Suggested Books for Further Studies
- “The Intelligent Investor” by Benjamin Graham
- “Flash Boys: A Wall Street Revolt” by Michael Lewis
- “A Random Walk Down Wall Street” by Burton G. Malkiel
Fundamentals of Limit Orders: Securities Trading Basics Quiz
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