A limit order lets you set your own price for buying or selling an asset. If the market reaches the price you specified as your limit, your order will be executed. However, if the market does not reach the limit price you have set, your order will be canceled. But what exactly is a limit order?
What Is Limit Order?
A limit order is a type of order that allows you to buy or sell a security at a set price or better. In the trading world, placing a limit order on an asset allows you to acquire or sell it at a predetermined price or higher.
In the case of buy limit orders, the order will be executed only at the limit price or a lower price, whereas sell limit orders will be executed only at the limit price or a higher price. This requirement gives merchants more control over the prices they charge.
The investor ensures that he or she will pay the specified amount or less by placing a purchase limit order. The price is guaranteed, but the order is not, and limited orders will not be executed unless the asset price meets the order qualifying requirements. If an asset fails to achieve the stated price and the order is not completed, the investor may lose money.
How Limit Order Works
A limit order is used to buy or sell a security at a predetermined price. For example, if a trader wants to buy XYZ’s stock but has a price limit of $14.50, they will only buy the stock at that price or lower. If the trader wants to sell shares of XYZ stock with a limit of $14.50, the trader will not sell any shares until the price reaches $14.50 or higher.
The investor is guaranteed to pay the buy limit order price or better by using a buy limit order, but the order is not guaranteed to be filled. A limit order gives a trader more control over the execution price of a security, which is useful if they are hesitant to use a market order during periods of high volatility.
Limit orders are useful when a stock is rapidly rising or falling and a trader is concerned about getting a bad fill from a market order. A limit order can also be useful if a trader is not watching stock and has a specific price in mind at which they are willing to buy or sell that security. Limit orders with an expiration date can also be left open.
Stop-limit vs Stop price
A stop-limit order is a type of advanced order that does not execute immediately after it is placed. This is the case because the trader sets a price limit at which the order will be executed. A stop-limit order has two prices: the stop price, which converts the order into a buy or sells order, and the limit price, which is the highest price a trader is willing to pay for a purchase or the lowest price he is willing to sell for.
A stop-limit order is initially marked as “Active.” When a specific price (the stop price) for purchasing or selling an item is reached or crossed, a stop order is triggered.
Stop orders are generally used in the financial markets. Only after the order has been triggered will it be entered into the order book with the limit price and become visible to everyone in the market.
Limit Orders vs. Market Orders
When an investor places a buy or sell order on a stock, he or she has two price execution options: place the order “at market” or “at limit.” Market orders are transactions that are intended to be executed as soon as possible at the current or market price. A limit order, on the other hand, specifies the maximum or minimum price at which you are willing to buy or sell.
Purchasing stocks is analogous to purchasing a car. When buying a car, you have two options: pay the dealer’s sticker price and get the car, or negotiate a price and refuse to finalize the deal until the dealer meets your price. The stock market operates in a similar manner.
A market order deals with the execution of the order; the price of the security is secondary to the speed of completing the trade. Limit orders deal primarily with the price; if the security’s value is currently resting outside of the parameters set in the limit order, the transaction does not occur.
FAQs
What Is a Limit Order?
A limit order is a direction given to a broker to buy or sell a security at a specific price or better. It is a way for traders to execute trades at desired prices without having to monitor markets constantly. It is also a way to hedge risk and ensure losses are minimized by capturing sale prices at certain levels.
What Is the Difference Between a Limit Order and a Stop-Limit Order?
A limit order is an order requesting the purchase or sale of securities should a specific price be met. A stop-limit order builds one additional layer that requires a specific price to be met that is different than the sale price.
For example, a limit order to sell your security for $15 will likely execute when the market price reaches $15. Alternatively, a stop-limit order can be placed to sell your security for $15 only if the share price has dropped from $20 to $16.
How Long Does a Limit Order Last?
The term of the limit order will depend on your specification and your broker’s policy. Many brokers default limit orders to day-only trades; any unfilled orders at market close are canceled without execution.
Other brokers may offer a specific number of days often in intervals of 30 (i.e. 30 days, 60 days, or 90 days). Last, some brokers offer limit orders that are considered good until filled; the limit order will remain valid until it is filled or deliberately canceled by the trader.
Conclusion
When you want to buy or sell a coin at a lower price, a limit order can be an excellent trading tool. It can be used to maximize unrealized gains or to limit the possibility of loss. However, before deciding on an order type, you should understand the various options and consider how each one fits into your overall portfolio and trading strategy.
