Limit Order
A limit order is a special kind of order that is used to either sell or purchase a security for an already established or better price. In order for traders to control the prices at what they are trading while selling limit orders, the orders are executed either at a lower price or a limit price.
Investors are required to pay the established price or less when using a limit order. Despite the fact that the price is guaranteed, the order's filling isn't. In case if the secured price meets the limitations of the order, the limit orders are going to be executed. The commercial opportunity might be missed by investors if the money doesn't reach the established price.
Limit orders in action
In order to better understand how limit orders work, we will give an example. For instance, if there is a trader that wants to purchase a certain stock, but has a limit of $20; they will not be able to buy a stock the price of which is higher than $20. The situation is the same with selling stock shares. If there is a limit on it the sellers will not be able to sell shares if the price is lower than they intend to sell it for. With the help of limit orders traders can control the price of a security.
The limit order can be used when the stock moves really quickly (it can either be rising or falling). In situations like these, traders are worried that they are going to get a bad fill from the orders used to buy and sell stock. Limit orders can come in handy for those traders who already know at what price they would like to buy or sell the security.
Limit orders vs. market orders
When making a market order you are expected to pay for your shares regardless of their price. With the limit order, however, you can specify the price you want to pay for a stock. The traders ability or inability to control the price of a stock they want to purchase is the main difference between limit and market orders.
Additionally, market order is great for you if you would like to get a stock right away. They are also good for liquid stocks (stocks that trade very heavily). Limit orders are great if you don’t want to pay extreme prices for shares, and want to specify your price.
Limit order vs. stop-limit order
The first question that can be asked when dealing with stop-limit orders is: What is a stop? A stop or a stop loss is a way of saying that an investor is seeking to limit loss on their trade. It is most commonly used on sell orders when they are holding an existing stock.
With a stop-limit order you are waiting for the prices to go up and once it hits the target price, it will trigger a limit order to buy once the stock price starts decreasing. They work exactly the same way as stop orders, except the order will only execute if a specific price that you set is actually available. A stop-limit order is like stop order, but it has an extra layer – a limit price.
Duration of a limit order
The amount of time that the limit order is going to last depends on the policy of your intermediary. Make sure to consider your broker’s offer. Some of them offer a certain number of days, whereas others offer limit orders that are considered good until filled.
The reasons why the order might not fill in
There are several reasons why a limit order might not fill in. They are:
- A security does not have liquidity;
- There is no price action on your security;
- There aren’t any shares trading at the price you placed;
- Price volatility.
Buying and selling limit order
Buying limit order. If we want to buy a stock but there is a limit to how much you are willing to pay for it. Let's say we have a stock trading at $40 and you put in a limit for $25, meaning $25 is the maximum amount of money you are willing to pay. The trade will not execute until it goes to or below the price that you specify.
Selling limit order. You're once again saying that you want to sell a stock, but there is a limit on how low you would sell it for, in this case you will only sell it if it is about a certain price. So, the price that you enter on a sell limit order means that you want to sell it at that price or higher. Let's imagine that you got that stock for $25. Now you put in a limit sell for $30. That means that when the stock price hits $30 or higher, the trade will execute, and your shares will consequently start to sell.
Keep in mind that with a limit order, your trade is not necessarily guaranteed to fill completely. It is possible to only get part of your order filled if the price moves too quickly and it doesn't go back to your limit price. There is also a possibility that it is going to be filled in several different parts.
Pros and cons of using limit orders
An advantage of using limit orders is that you get to set your own price, which means that you will always be aware of the price of the share because you know the limit that you set. The disadvantage here is that your trade is not guaranteed to go through. Which means that you could be potentially missing out on some trades.
