Limit Order Definition

By | January 19, 2013

What is Limit Order?

Limit order allows an investor and trader  to buy or sell a stock at a price he/she is willing to trade with. This ensures that the investor and trader will never pay more for the stock than whatever price is set as his/her limit. Limit orders also allow an investor and trader to limit the length of time an order can be outstanding before being canceled. Limit orders are especially useful on a low-volume or highly volatile stock.

 

Difference between Limit,Stop and Market Order?

A limit order differs from a market order, which is executed at the current price regardless of what that price is. It also differs from a stop order, which becomes a market order when the stop price is reached and the order is executed at the best available price.

Limit orders are referred more specifically as a buy limit order ,or sell limit order.

 

 

Types of Limit Order?

BUY LIMIT ORDER allows an investor to purchase a stock at or below the specified price that they are willing to pay for it. If the specified price is never met, the order will not be filled and the investor may miss out on the trading opportunity.

For Example– If a investor wants to buy a stock and willing to pay not more than Rs 1000, the investor can put the limit order to purchase the stock at Rs1000. By entering the limit order , when the price of the stock comes at Rs1000, the order will automatically be executed.

 

SELL LIMIT ORDER  allows an investor to sell a specified number of shares of a stock that you own at a specified price or higher than the current market price.

For Example– Suppose an investor own 1000 shares of JP Associate  ltd. And it is trading at Rs100 per share. He would like to sell the shares and take profits if the stock’s price reaches to Rs 110 per share. As he feels that the stock’s price is not going to go much higher than Rs110; he place a sell limit order @Rs110 on 1000 shares of JP Associate ltd. As long as the price remains above Rs110,  shares would then be sold at the next best available price that is Rs110 or higher.

The main benefit of a Sell Limit Order is that you may be able to sell the shares that you own at a minimum price that you specify if the stock’s price raises to that price. Sell Limit Orders are great for maximizing profit-taking.

 

WHY LIMIT ORDER MATTERS- By using limit orders, you can protect yourself from buying a stock at too high price or selling at too low price.

NOTE:-  If the price of the stock never reaches your limit price, your trade won’t be executed.  Also check your broker’s fee schedule; some brokers charge more to execute a limit order than they do for a market order.

 

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2 thoughts on “Limit Order Definition

  1. Dustin Small

    Limit orders are a great way to ensure that you don’t overspend on a stock when buying. One alternative to use however is to sell a put option instead of using a buy limit. That way you can actually get paid while you wait for price to drop to your entry point.

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