
A stock limit order is a type of order that allows you to buy or sell a stock at a specific price or better. This means you'll only execute the trade if the market price reaches or exceeds your specified price.
To place a stock limit order, you'll need to specify the stock symbol, the price you want to buy or sell at, and the quantity of shares you want to trade. For example, if you want to buy 100 shares of Apple stock at $150 or less, you would place a buy limit order at $150.
The key benefit of a stock limit order is that it helps you avoid overpaying for a stock, as you'll only buy it at or below your specified price. This can be especially useful during times of market volatility.
In addition to helping you avoid overpaying, stock limit orders can also be used to sell stocks at a specific price or better, which can help you lock in profits or limit losses.
If this caught your attention, see: Day Trading Foreign Currency
What is a Stock Limit Order?
A stock limit order is an instruction to a broker to buy or sell a stock at a specific price or better. It's a way to set a target price for a trade.
You can use a limit order to buy a stock at a preferred price or better, and it's especially useful when you think a stock's price will rise in the near future. For example, if you want to buy a stock that's currently trading at $50, you can place a limit order to buy it at $48 or lower.
A limit order can be a useful tool for investors who want to avoid overpaying for a stock. By setting a limit price, you can ensure that you don't pay more than you're willing to pay. This can help you stick to your budget and avoid making emotional decisions based on market fluctuations.
Limit orders can also be used to sell a stock at a specific price or better. This can be useful if you want to lock in profits or cut losses. For instance, if you bought a stock at $100 and it's now trading at $120, you can place a limit order to sell it at $125 or higher.
By using limit orders, you can take a more disciplined approach to investing and avoid making impulsive decisions based on short-term market movements.
Recommended read: Limit Orders
Benefits and Risks
A limit order can be a powerful tool in your trading arsenal, but it's essential to understand its benefits and risks.
A limit order guarantees that an order is filled at or better than a specific price level.
One of the key benefits of a limit order is price control, which allows you to ensure you pay no more than your set price or potentially even less if the stock price falls below the limit.
A buy limit order can benefit from price decrease, allowing you to purchase a stock at a lower price if you anticipate a price drop.
However, a limit order is not guaranteed to be filled, and there's a risk of non-execution if the stock doesn't hit your price.
Limit orders work best in liquid markets, but in less active stocks, there may not be enough volume to fill your order at your target price.
In fast-moving market conditions, a limit order can result in missed opportunities, but it can be used in conjunction with stop orders to prevent large downside losses.
Suggestion: Do Money Orders Have a Limit
A limit order is usually valid for either a specific number of days (i.e. 30 days), until the order is filled, or until the trader cancels the order.
Here are some potential advantages and disadvantages of a sell limit order:
- Price control: A sell limit order gives you control over the price you sell your stock.
- Avoid selling at a loss: By setting a limit price, you avoid selling at a lower cost than you’re willing to accept.
- Lock in profits: If you believe the stock price has risen to a reasonable level, a sell limit order helps you lock in profits.
- Missed opportunities: The primary disadvantage of a sell limit order is that if the stock price never reaches your set limit, your order will not be filled.
- Market volatility: In volatile markets, the stock price may hit your limit briefly and then quickly reverse, leading to missed sales opportunities.
Using a Stock Limit Order
A limit order is an instruction for a broker to buy or sell a stock at or below a set price, or to sell a stock at or above the indicated price.
You can use a limit order to control the price you buy or sell at, which can be especially helpful during periods of market volatility. This type of order ensures trades occur at a specific price or better, avoiding overpaying or underselling.
There are various options for limit orders, including day limit orders, good-'til-canceled (GTC) limit orders, and day + extended limit orders. Day limit orders expire at the end of the standard trading session, while GTC limit orders carry forward until executed, expired, or manually canceled by the trader.
If this caught your attention, see: What Is a Stop Limit Stock Order
Here are some key scenarios when you might want to use a limit order:
- Control the price: Buy or sell limit orders may ensure trades occur at a specific price or better, avoiding overpaying or underselling.
- Trading outside regular hours: Limit orders can maintain price control during low-liquidity pre-market or after-hours trading.
- Market volatility: Limit orders may help avoid unfavorable prices in fast-moving markets by setting a specific trade price.
- Thinly traded stocks: Limit orders can prevent overpaying or underselling in stocks with low liquidity and wide bid-ask spreads.
- Set-and-forget trades: Limit orders may automate trades at target prices without constant market monitoring.
- Long-term strategy: Limit orders can enable investors to target specific entry points for better price control over time.
How to Use?
To use a stock limit order, you set a specific price at which you're willing to buy or sell a stock. You can place a buy limit order or a sell limit order, and the broker will only execute the trade at the limit price or better.
A limit order allows you to control the price you buy or sell at, which can be especially useful during periods of market volatility. By setting a specific price, you can avoid overpaying or underselling, and ensure that your trade is executed at a price that meets your needs.
You can set a limit order to execute during the standard market session, pre-market, or after-hours trading sessions. Day limit orders expire at the end of the standard trading session, while good-'til-canceled (GTC) limit orders carry forward from one standard session to the next, until executed, expired, or manually canceled by the trader.
Discover more: Stocks to Trade Paper Trading
To place a buy limit order, you specify the price at which you're willing to buy the stock. For example, if you want to buy XYZ stock and only want to pay $20, you may enter a limit order for $20. This indicates you are willing to purchase the stock only if the price falls to $20 or below.
To place a sell limit order, you specify the price at which you're willing to sell the stock. For example, if you want to sell XYZ stock and only want to sell for $36, you may set a limit of $36. This indicates you want to sell the stock only if the price increases to $36 or above.
Here are some key scenarios when you might want to use a limit order:
- Control the price: Buy or sell limit orders may ensure trades occur at a specific price or better, avoiding overpaying or underselling.
- Trading outside regular hours: Limit orders can maintain price control during low-liquidity pre-market or after-hours trading.
- Market volatility: Limit orders may help avoid unfavorable prices in fast-moving markets by setting a specific trade price.
- Thinly traded stocks: Limit orders can prevent overpaying or underselling in stocks with low liquidity and wide bid-ask spreads.
- Set-and-forget trades: Limit orders may automate trades at target prices without constant market monitoring.
- Long-term strategy: Limit orders can enable investors to target specific entry points for better price control over time.
By using a limit order, you can take control of your trades and ensure that you're buying or selling at a price that meets your needs.
Share Repurchases
Companies buy back their own stock on the open market, which is known as share repurchases. This can help boost the stock price by reducing the number of shares outstanding.
Share repurchases can be a way for companies to return value to their shareholders. Sometimes, companies use this strategy to signal to investors that they believe their stock is undervalued.
By buying back their own stock, companies can also reduce the number of shares they have outstanding, which can make their remaining shares more valuable.
For your interest: What Are Shares in Stock Market
Understanding the Market
When you place an order to buy or sell a stock, you have two main execution options: market orders and limit orders.
A market order executes immediately at the current market price, ensuring fulfillment but with no price control. This means your order will fill at whatever the current stock price is, allowing for quick execution but no guarantee of a set price.
Limit orders, on the other hand, focus on purchasing stock at a specific price or better. They give you more control over unpredictable and fluctuating stock prices, but they may not execute if the market price doesn't meet your limit price.
Market
A market order lets you buy stock at the current price.
You can place a market order to buy stock at Blue Company at the current market price, and your order will fill at whatever the current stock price is for Blue Company.
Market orders focus on quickly fulfilling the order, which can be beneficial if you want to buy or sell a stock as soon as possible.
However, market orders have no price control, which means you won't get to choose the price at which you buy or sell the stock.
Market orders are also more straightforward for a brokerage to perform than limit orders, which can result in lower fees.
But, unlike market orders, limit orders can give you more control over unpredictable and fluctuating stock prices.
Market orders deal with the execution of the order, and the price of the security is secondary to the speed of completing the trade.
See what others are reading: Ocommon Stock Penny Stock Preferred Blue Chip
A market order means you buy stock at the current price, and it's a way to immediately buy a security at its current value.
Market orders are often used when you want to buy or sell a stock quickly, without worrying about the price.
You can use market orders to buy or sell stocks, but it's essential to understand the risks involved and how market orders can contribute to your end goal as an investor.
Bid-Ask Spread
The bid-ask spread is the gap between the highest bid price and the lowest ask price for a particular stock. It's always present, but sometimes it's relatively small.
The bid price is the highest price a buyer is willing to pay for a stock, while the ask price is the lowest price a seller is willing to accept. The bid price is always lower than the ask price.
For example, if the highest bid is $10/share, and the lowest ask is $10.50/share, the bid-ask spread for that security would be $.50. This spread can vary depending on market conditions and the stock's liquidity.
Investors using limit orders to buy securities need to keep in mind the difference between the bid and ask prices. The stock's asking price must be at the limit order price or lower for the order to be filled.
Discover more: Stock Price
Time Frames
You can determine the time frame for your limit order to remain active, which is a key consideration when trading.
A day-limit order remains active only during the trading period and does not carry over into after-hours trading sessions.
To keep your order active for a longer time, you would opt for a good till canceled, also known as GTC.
A GTC limit order carries over into the next trading sessions until it expires, executes, or you decide to cancel the order.
Understanding stock market hours will also help guide you when trading.
Frequently Asked Questions
How do you profit with a limit order?
To profit with a limit order, you set a target price (profit price) and a lower limit price, and the order is triggered when the market price reaches the target, selling at the limit price or better. This strategy helps you lock in profits when the market reaches your desired level.
What is the disadvantage of using a limit order?
Limit orders may not execute if the stock price doesn't reach the set limit or if there's insufficient demand or supply. This risk is higher for small, illiquid stocks
Featured Images: pexels.com