Limit orders allow you to specify the maximum price you’ll pay when buying securities, or the minimum you’ll accept when selling them. Limit orders are filled only if the stock’s market price reaches the limit price you entered within the time frame specified in your duration. While limit orders do not guarantee execution, they can help you set a pre-determined price at which you want to buy or sell securities.
Let’s use some practical examples to make it easy to understand.
As mentioned above, limit orders can be used for either buying or selling securities.
- Buy limit order: suppose stock XYZ is trading $20 a share. You’re interested in buying 100 shares of the stock, but you’re not willing to pay more than $19.00 per share for it. While the price is currently trading at $20, you can place a limit order to buy 100 shares at $19.00 or lower now. If, later on, the price drops to $19.00\share within the time frame selected in your duration, the limit order will trigger and execute at $19.00 or lower (given there’s adequate enough supply in the market).
- Sell limit order: suppose you own 300 shares of stock XYZ which is currently trading at $49 a share. While you had a great run with XYZ shares, you’re ready to sell the shares if the stock price reaches $50/share. You can automate your trade by placing a limit order to sell your 300 shares at $50 each today, but it will only get executed if the market value of the stock reaches your limit sell price of $50 a share. If there’s adequate enough liquidity, and the value of the shares increases to $50 within your specified duration time, the order will execute and you will receive the proceeds from the sale.
Time component: as mentioned, when you enter a limit order, you’re required to specify your duration. The duration you choose determines the amount of time your order will be active for before expiring.
Important to know:
- Limit orders are never guaranteed to execute
- When buying shares using limit orders, your trades get executed when your limit price matches the market’s ask price. When selling, your limit price is executed when it matches the market’s bid price