Limit Order

Definition

A limit order is a financial term that refers to a type of order a trader or investor places to buy or sell a certain number of securities at a specified price or better. It allows a trader to specify their desired price, ensuring the trade will only execute if the market price reaches this level. This provides control over the price point but does not guarantee that the order will be filled.

Phonetic

The phonetic pronunciation of “Limit Order” is “ˈlɪmɪt ˈɔːrdər”.

Key Takeaways

Sure, here are three main takeaways about a Limit Order:

1. A Limit Order allows an investor to buy or sell a security at a specific price or better. This type of order allows traders to have control over the price at which they trade.
2. There are two types of Limit Orders – a buy limit order and a sell limit order. A buy limit order would only be executed at the limit price or lower, while a sell limit order can only be executed at the limit price or higher.
3. While Limit Orders ensure price, they don’t guarantee execution. If the security does not reach the price specified by the investor, then the order is not filled.

Importance

A Limit Order in business or finance is important as it allows investors to have precise control over when their trades are executed by setting a specific price at which they wish to buy or sell securities. Unlike market orders, where trades are executed at the current market price, limit orders only execute when the asset’s price meets the investor’s set limit. This ensures that investors can mitigate risk and volatility, preventing them from buying too high or selling too low. This level of control makes limit orders a powerful tool for disciplined investing, enabling strategic entry and exit points, thus potentially leading to improved returns.

Explanation

A limit order is a powerful tool investors and traders use to have strategic control over their trades. Its purpose is to buy or sell a stock at a specific price or better, enabling individuals to precisely set the price at which they are willing to trade. Whether you’re purchasing or selling stock, a limit order allows you to determine and fix the maximum price you’re willing to pay or the minimum price at which you’re willing to sell. Not only does it provide a safeguard from market fluctuation, but it also ensures that the trades will only be executed at your terms.Primarily, limit orders are used when one has a clear price threshold, and they are unwilling to negotiate that figure. In a volatile market, if an investor believes a stock’s worth might surge or drop fast, a limit order potentially ensures they don’t miss out on an opportunity. Furthermore, it can also be used to systematically target specific entry and exit positions if an individual is unable to actively monitor their portfolio throughout the trading day. Therefore, limit orders gain relevance in providing investors with the upper hand in managing their trades by defining the terms and mitigating risk.

Examples

1. Buying Shares at Lower Price: Let’s say you’re studying the stock market and notice that the shares of a company called “XYZ” are currently trading at $100. You are interested in buying these shares, but only at $90. In this case, you can place a limit order to buy the shares if and when they drop to that price. If XYZ drops to $90 or below, your limit order would be executed, effectively getting you the stocks at the price you wanted.2. Safety Net for Profit: Consider that you’ve invested in a company called “ABC” at a share price of $45. The current market price rose to $60, gaining you profit. However, you fear it may drop. To protect yourself, you utilize a sell limit order at $55. This ensures if the share price falls to $55 or lower, it will automatically be sold, securing your profit.3. Investing in IPOs: A hot new company named “DEF” is about to become publicly traded, but their shares are in high demand, which you speculate will lead to an initial surge in price. You place a limit order to buy the shares at the offering price. If the shares open at or below the issuing price, your limit order will go through. If the price spikes due to high demand, your order won’t be executed, protecting you from paying more than you wanted.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Stop-Loss Order
• Market Order
• Buy Limit Order
• Sell Limit Order
• Order Book

Sources for More Information

• Investopedia
• Fidelity
• Charles Schwab
• NerdWallet