Limit Order

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What is a Limit Order?

A limit order provides an instruction to the broker to execute a trade ticket if the price of the security being bought or sold reaches a certain level or better – the limit price. Both buy and sell orders will only be executed if the market price matches the limit price.

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With limit orders, investors can control the price they get when buying or selling financial instruments. However, there are no guarantees that the order will be executed as the market price may never reach the limit price before the order expires.

Techopedia Explains the Limit Order Meaning

Techopedia Explains the Limit Order Meaning

The difference between a limit order and a market order is that the latter is executed at the best available price, while the former is only executed if and when the market price matches the limit price. Investors can use limit orders to control the entry and exit prices of their trades more efficiently. However, the downside is that the order may never be executed.

With buy orders, the order is executed only if the price is equal to or lower than the limit price, while sell orders are executed only if the price is equal to or higher than the market price.

Limit orders may stay open for as long as the investor wants. Depending on the broker, most financial services firms offer options like day, good-til-canceled (GTC), and all-or-none (AON) orders.

How Limit Orders Work

How Limit Orders Work

A buy limit order prevents the investor overpays if the stock price unexpectedly increases.

For example, if an investor wants to buy shares of Tesla (TSLA) but only if the price dips below $120 per share, they could place a buy limit order for TSLA and set the limit price at $120. As long as the order remains open, if TSLA stock trades at a price of $120 or lower at any point, the order will be executed by purchasing the shares at that price or cheaper.

Meanwhile, for a sell limit order, once the stock rises to the limit price or higher, the order will be filled by selling the investor’s shares at that price or better. This protects investors from selling too low if there is a surprise drop in the stock price.

Say an investor owns shares of Tesla (TSLA), currently trading at around $140 per share. If they want to sell but only if the stock reaches $150 or higher, they could place a sell limit order for their TSLA shares and set the limit price at that level. If TSLA stock hits $150 or higher before the order expires, their shares will be automatically sold.

Investors may want to use a limit order in one of the following two scenarios:

  1. They have a target buy or sell price in mind for the security based on their analysis or personal preferences.
  2. They want to automate the buying or selling process without constantly monitoring the stock’s price movements.

Meanwhile, limit orders offer price protection but do come with some drawbacks compared to market orders:

  • No guarantee of execution if the stock never hits the limit price.
  • Potential to miss out on better prices if the stock moves past the limit price quickly.
  • Risk of partial fills that could prevent some shares from being bought or sold if price volatility is high.

When to Use Limit Orders

Now that we have studied the definition of limit order, it is worth noting that there are specific instances in which this type of instruction may be the wisest alternative for traders to operate in the financial markets. Here’s a summary of the five most common ones where it makes sense to use limit orders.

Trading Volatile SecuritiesBuying or Selling Illiquid StocksUnable to Monitor the MarketsImplementing a Well-Defined Buy or Sell StrategyMinimizing Broker's Pricing Leeway

For securities that can experience wild price swings in relatively short periods, limit orders can help investors avoid the risk of unfavorable executions on market orders if short-term spikes or dips occur. They offer a way to automate trades.

For low-volume financial assets that may have wide bid-ask spreads, market orders can suffer from slippage between the displayed price and the actual execution price. Limit orders allow investors to specify the exact entry or exit price that they would like to get on illiquid securities.

Limit orders are a convenient way to automate trades based on price levels when the investor is unable to keep an eye on the markets. The limit order will remain open for as long as the investor instructed, and the system will be patiently waiting to execute when the price criteria are met. This helps reduce mental pressures and irrational or emotional trades.

Seasoned traders stick to their systems and rules when they operate in the markets. They use limit orders to establish the specific price points that they would be satisfied with either to buy or sell the security of their choosing.

By setting a firm limit price, the investor prevents the broker from being able to execute the order at any price, as the outcome could be unfavorable to the investor if the bid/ask spread is too wide.

Types of Limit Orders

Types of Limit Orders

Buy Limit Order
  • Specifies the highest price the investor is willing to pay per share.
  • The order is executed at the limit price or lower once that price is reached.

Sell Limit Order
  • Specifies the lowest price the investor will accept for selling the shares.
  • The order is executed at the limit price or higher once that price is reached.

In addition, brokers offer the possibility to set a specific time window during which the limit order can be executed. Once that time period lapses, the order is automatically canceled.

Day Limit Order
A day limit order is only valid for the current trading day. If the order is not executed by the end of the standard session, it expires and must be re-entered the next day.
Good-til-Canceled (GTC) Limit Order
A GTC limit order remains open and active until it is either executed or explicitly canceled by the investor. In this case, the preferred execution date is not defined.
Limit on Open/Close
Investors can further specify that a limit order only executes during the market open or market close by adding “limit-on-open” or “limit-on-close” instructions.
All-or-None (AON)
An AON limit order requires that the full order quantity has to be filled in one execution. If only part of the order can be filled, the entire order is rejected and stays open.

    In addition to customized expiration times and full/partial fill requirements, limit orders can be combined with other advanced order types, like stop orders, to create more sophisticated instructions that fit the trader’s system and strategy.

    Limit Orders vs. Market Orders

    This is a summary of the key differences between limit orders and market orders:

    Limit order

    • Executed at the specified limit price or better
    • No guarantee of execution if the price does not reach the defined threshold
    • Offers price protection and control
    Market order

    • Executed immediately at the current market price
    • Guaranteed execution at the best available price
    • No control over the execution price

    A market order is generally a better choice for liquid stocks with tight bid-ask spreads when executing the trade immediately takes priority over getting a specific price or when price volatility is low in the near term.

    However, for less liquid stocks or during periods of high volatility, limit orders give investors more control by allowing them to set a price threshold that the system will respect when executing the instruction. This price protection comes at the cost of having no guarantees that the trade will be ultimately executed.

    Market orders guarantee execution at whatever the current market price is at the time. However, limit orders only execute if the price moves to the investor’s specified limit price or better before expiring.

    Limit Orders vs. Stop Orders

    Stop orders are another type of conditional order used to automate trades, but they work in the opposite way as limit orders:

    Limit order

    • Executes at the limit price or better, if reached.
    • Used to set a target buy or sell price.

    Stop order

    Executes a market order once a stop price is reached.

    Used to limit losses or lock in gains on existing positions.

     

    With a stop order, once the stop price is reached, the system automatically creates and executes a market order to buy or sell the instrument at whatever the current market price is at that point.

    For example, an investor could set a stop-sell order on a stock they own at $40 – the stop price. If the stock drops to $40, a market sell order would be triggered at that point to exit the position. The risk in this case is that the market order could be filled at a price lower than $40 if price volatility is high at the time.

    Stop orders are generally used as exit signals and risk management tools, while limit orders are used to automate entries and exit at precise price targets.

    Limit Order Examples

    Example 1

    Imagine that the stock ABC is currently trading at $25 per share. An investor wants to buy the dip, but only if the stock falls to $15 or lower, as this would provide a good opportunity based on their analysis. They place a buy limit order for 100 shares of ABC with a limit price of $15.

    If ABC’s price drops down to $15 or lower at any point before the order expires, the order will be automatically executed by purchasing 100 shares of ABC. However, if ABC stays above $15, the limit order will not be filled.

    Example 2

    On the sell side, let’s say that the same investor already owns 200 shares of ABC from a previous purchase, with an average cost basis of $22 per share. However, he wants to sell if the stock rallies up to $30 per share.

    To automate that exit, the investor places a sell limit order for 200 shares of ABC with a $30 limit price. If ABC stock reaches $30 or higher before the order expires, the order will be executed by selling all 200 shares at that price or better.

    However, if ABC fails to hit $30 during the order’s maximum time period, the sell limit order will simply expire unexecuted, leaving the investor still holding the shares.

    Partial Fills on Limit Orders

    Limit orders may not be filled entirely if the system is unable to find buyers and sellers who are willing to match the limit price. When just a fraction of a trade ticket is executed, that is known as a partial fill.

    Let’s say an investor wants to buy 1,000 shares of ABC stock, as discussed in the earlier example, but another party is offering only 500 shares at the limit price or better. Unless the trade ticket is set up to all-or-none, the system will buy the 500 shares and leave the remaining 500 shares separately in an open order that has yet to be filled.

    Partial fills may only be avoided with AON orders, as they require that the entire quantity be bought or sold at once. The downside of this type of order is that it may never be filled unless the market price eventually matches the limit price.

    Limit Order Pros and Cons

    As with all types of trade orders, limit orders have advantages and disadvantages that traders must understand and consider before using them. Here’s a summary of their pros and cons.

    Pros

    • Price control
    • Automated execution
    • Protection from slippage
    • Limited losses

    Cons

    • No guarantee of execution
    • Partial fills
    • Fat finger errors
    • Market closures

    By understanding and proactively managing these risks, investors can use limit orders to their advantage while avoiding nasty surprises like human errors or changing market conditions.

    The Bottom Line

    Limit orders are an essential tool for traders and investors who want to exercise more control over the prices they pay or get when buying or selling stocks and other securities.

    By setting specific limit prices, investors can automate trade execution once their preferred price levels are reached without to need to constantly monitor positions or market prices.

    However, limit orders do not guarantee fills and come with the risk of missing further price movements or better entry/exit opportunities if the limit price is too strict.

    Combined with other advanced order types and duration settings, limit orders can be quite flexible and powerful. However, that flexibility also adds complexity that requires prudent risk management by investors.

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    Alejandro Arrieche Rosas
    Financial Reporter
    Alejandro Arrieche Rosas
    Financial Reporter

    Alejandro has seven years of experience writing content for the financial industry and more than 17 years of combined work experience, serving under different roles in multiple business fields, including tech and financial services. Before joining Techopedia, Alejandro collaborated with numerous online publications such as Seeking Alpha, The Modest Wallet, Capital.com, Business2Community, EconomyWatch.com, and others, covering finance, business news, trading platform reviews, and educational articles for investors. Alejandro earned a Bachelor's in Business Administration from UNITEC, Venezuela, and a Master's in Corporate Finance from EUDE Business School, Spain. His favorite topics to cover are value investing and financial analysis.