One of the most common challenges investors face is deciding when to buy or sell a particular stock. To simplify this process, they often use limit orders. In this guide, we uncover the limit order definition and share critical details about using this tool in stock trading.
What Is A Limit Order?
A limit order enables investors to buy or sell securities at a specified price point or one better than it. Unlike market orders, which are executed immediately at the prevailing market price, limit orders allow setting a price limit for the trade. This means the order will only be executed if the market price reaches or surpasses the limit price.
What You Need To Know About Limit Orders
Let’s say a company is currently trading shares at $50 per share. You believe that their value will increase in the future yet you are not willing to pay more than $52 per share. In this case, you would place a limit order to buy shares at a limit price of $52.
This means that if the market price of the company’s shares rises to $52 or higher, your order will be executed and you will buy them at the limit price of $52 or less. However, if the market price does not reach $52, your limit order will not be filled.
Similarly, if you already own shares of this company and want to sell them, but only wish to do so for $55 per share or more, you would place a limit order with a limit price of $55.
Remember that if the limit price is too high, you may end up overpaying for the security, while setting it too low may result in missing out on potential gains.
Finally, note that setting a limit order does not offer any protection against price gaps, which occur when the market price of a security jumps from one level to another without any trades happening in between.
