What is a Limit Order?
The following text comes from our post “What is the Difference in Order Types” Check it out for the definitions of other order types!
A limit order is used for buy or sell orders. Limit orders allow for investor to set a maximum purchase price or minimum sell price for their shares.
Buy Limit Order
A buy limit order is used to set the maximum price you are willing to pay for the shares.
Using the same example above, you may submit a limit order for $82.00. This would mean that the maximum price you are willing to pay is $82.00 per share. If the security never drops down from $82.41 to $82.00, you will not purchase any shares.
This type of order gives investors a little more safety from potential market volatility, as it sets a maximum price you are willing to pay.
For a buy limit order, the limit price set should be at or lower than the current market price.
Sell Limit Order
A sell limit order is used to set the minimum price you are willing to sell the shares for. With this order you already own the shares.
In the example above, you may set a sell limit order of $84.00 per share. This means that your shares will not be sold for any price under $84.00. If the security never rises to $84.00, you will never sell your shares.
For a sell limit order, the limit price should be at or above the current market price.
However limit order type also has some risks for investors:
- The shares available at your limit price may not be sufficient to satisfy your whole order. If you set a buy limit order for 2000 shares at $82.00 and the security briefly drops down to $82.00, there may not be 2000 shares available at that price. If only 1000 shares are available at $82.00 before the price rises higher, you will only purchase 1000 unless more shares become available.
