• Buy limit orders will only be executed at the limit price or lower.
• Sell limit orders will only be executed at the limit price or higher.

Although the price is guaranteed, the completion of the order is not guaranteed. A limit order will only be executed if the price meets the order conditions.

The opposite of a limit order is a market order, which requires the transaction to be executed as soon as possible at the current market price and does not set a price limit.

Key Points

• Limit orders ensure that the order is filled at a specific price level or better.
• However, a limit order does not guarantee that it will be filled.
• Limit orders control the execution price, but can result in missed opportunities in rapidly changing market conditions.
• Limit orders can be used in conjunction with stop-loss orders to protect against large downside losses.
• Limit orders are usually valid for a specific number of days (such as 30 days) until the order is filled or the trader cancels the order.

How limit orders work

A limit order is to buy or sell a security using a preset price. For example, if a trader wants to buy stock in Company XYZ, but the limit price is set at $14.50, they will only buy the stock at$14.50 or lower. If a trader sells XYZ stock at the limit price of $14.50, they will not sell any shares until the price reaches$14.50 or higher.

By using a buy limit order, investors are guaranteed to pay the limit order price or better, but there is no guarantee that the order will be filled. When markets are volatile, limit orders can give traders more control over execution prices, especially if they don't want to use market orders.

Limit orders are useful when stock prices are rising or falling rapidly, and traders are concerned that using market orders may result in unfavorable trades. In addition, limit orders can also set a specific buy or sell price if the trader is not paying attention to a stock at all times. Limit orders can also have expiration dates set.

Limit order example

A portfolio manager wants to buy shares of Tesla Inc. (TSLA) but thinks the current valuation of about $750 is too high and wants to buy when the stock price drops to a certain price. The manager instructed traders to buy 10,000 Tesla shares if the price fell below$650. The order was valid "until cancelled." The trader then placed an order at the limit price of $650. If the stock price drops below that limit, traders can start buying the stock. The order will remain in effect until the stock price reaches the limit price set by the manager or the manager cancels the order.

Additionally, the manager is looking to sell shares of Amazon.com Inc (AMZN) but believes the current price of around $2,300 is too low. He instructed traders to sell 5,000 shares if the price rose above$2,750, an order that was also valid "until cancelled." The trader would then place an order to sell 5,000 shares at a limit price of $2,750.

Note: If the limit order setting is illogical (for example, the buy limit is higher than the market price), the brokerage firm may not allow the limit order. Additionally, some brokerage firms may offer this service to investors at no charge.

The difference between limit order and market order

When an investor places an order to buy or sell a stock, there are two main execution price options: placing the order at the "market price" or placing the order at the "limit price." A market order is a trade designed to be executed as quickly as possible at the current market price. In contrast, a limit order sets the highest or lowest price you are willing to buy or sell. Typically, brokers charge higher fees when completing more complex limit orders.

Buying stocks can be compared to buying a car. When buying a car, you can either pay the dealer's list price and get the vehicle outright, or you can haggle with the dealer and refuse to complete the deal if they don't meet the price. The stock market can be viewed as a similar working mechanism.

Market orders focus on the execution of the order; the price of the security is secondary after that, and the speed with which the trade is completed is more important. Limit orders, on the other hand, focus primarily on price; if the value of the security currently exceeds the parameters set by the limit order, the trade will not occur.

What is a limit order?

A limit order is an instruction given to a broker to buy or sell a security at a specific price or better. This is a way for traders to execute trades at a desired price without having to constantly monitor the market. At the same time, limit orders are also a way to hedge risks and ensure that losses are minimized by capturing the sales price at a specific price level.

How do limit orders work?

A limit order is submitted to a broker and contains the security name, quantity, price, and whether you are buying or selling. The order will only be triggered when the market price reaches a certain expected price. Even so, in highly volatile markets, execution of limit orders is not guaranteed, especially for highly volatile securities with low liquidity.

What is the difference between a limit order and a stop limit order?

A limit order is an order that requests the purchase or sale of a security when a specific price is reached. The stop-loss limit order adds a layer of requirements on this basis and needs to reach a specific price that is different from the sales price. For example, a limit order to sell a security for $15 would typically be executed when the market price reaches$15. A stop limit order, on the other hand, can be set up to only sell the security if the stock price falls from $20 to$16.

How long is the validity period of a limit order?

The validity period of your limit order will depend on your regulations and your brokerage firm's policies. Many brokerage firms default limit orders to be valid for the day; any unfilled orders at market close will be canceled without execution. Other brokerages may offer settings for a specific number of days, usually in 30-day intervals (such as 30, 60, or 90 days). Finally, some brokerage firms offer "good until filled" limit orders, which will remain in effect until they are filled or canceled by the trader.

Why was my limit order not executed?

There may be several reasons why a limit order fails to fill. First, your limit order only triggers when the market price reaches the buy or sell price you set. If a security trades above your buy limit or below your sell limit, the trade generally will not fill until the price of your security moves.

Limit orders can only be filled if the security is liquid. If there are not enough shares of the security trading at the specific price you set, your order may not be filled. This situation is most common on low-volume securities. Due to volatility, stocks on the day of the IPO may face difficulty trading due to wild price swings.

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