A limit order is a type of order in which a security is either bought or sold at a predetermined price or at a better price. For buy limit orders, the order will only be executed at the limit price or lower, whereas for sell limit orders, the order will be executed only at the limit price or higher. This gives traders more control over the prices at which they transact.
By placing a buy limit order, the investor ensures that the price will not move above the limit. Limit orders will not be executed until the security’s price matches the order criteria. It is possible that the investor will miss out on a trading opportunity if the asset price does not reach a predetermined point in time.
Conversely, a market order executes a trade at the current market price without specifying a price range.
How does limit order work?
A limit order is the use of a predetermined price to buy or sell securities. For example, if a dealer wants to buy shares of XYZ 14.50, the stock is bought only at the rate of 14.50 per share.
If trader XYZ shares a . wants to sell with To the extent of 14.50, the trader will not sell any shares until the price rises 14.50 or higher. The investor is guaranteed to pay the purchase price or more by executing a buy limit order, but the order is not guaranteed.
A limit order allows a trader more control over the execution of a security’s price, especially if he or she is afraid to use market orders during times of heightened volatility.
There have been many situations where limit orders were used, for example when an inventory rose or fell too quickly, and a trader feared that a faulty order would be filled. In addition, if a trader does not closely monitor a stock’s price movements but is still willing to buy or sell at a predetermined price, a limit order can be used.
Read more: Stop-Loss Orders: An Effective Way to Limit Losses from Falling Stock Prices. details here
some examples
A portfolio manager wants to buy ABC stock but believes its current estimate is 325 per share price is high and would like to buy the stock only when it goes down 250. The manager asks his dealer to purchase 10,000 ABC shares at a price of . should be less than 250.
The trader then places a buy order of 10,000 shares with a limit of 250. If the stock falls below the price, the trader can start buying the stock. The order remains active until the stock is within PM limits or until the transaction is cancelled.
In addition, the portfolio manager wants to sell shares of XYZ, but believes its current price 1,350 is too low. He will be interested in selling his shareholding if the price hits the minimum 2,500. The trader would, in this case, place an order to sell 5,000 shares with a limit of 2,500.
Limit Order V/S Market Order
To buy or sell a stock, an investor has two basic price-related execution options: placing the order at market or at a limit. The purpose of a market order is to place a transaction at current or market prices as quickly as possible. Conversely, you are willing to place a buy or sell limit order that sets a maximum or minimum price.
The purchase of stock is similar to the purchase of an automobile. You can pay the sticker price to the dealer and get the car with you. Or, if the dealer doesn’t meet your pricing, you can reduce the price and refuse to liquidate it. Similarly, the stock market is also likely to work.
advantage of limit order
The biggest advantage of limit orders is that your price will be specified and the order will be fulfilled if the stock reaches that price. Sometimes the broker even gives a better price for your order.
loss of limit order
It is not a guarantee that you will be able to trade the stock. If the inventory does not reach the price limit, the deal will not be done. Although you can decide the price at which you want to buy or sell, demand or supply may not be enough for the order. For unpopular and liquid stocks, this scenario is more likely to occur.
Therefore, we can summarize that a limit order is setting a limit to buy or sell a security at a predefined maximum or minimum price.
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