What Is A Limit Order?

What is a limit order? A limit order is an order to a broker to buy a specified quantity of a security at or below a specified price, or to sell it at or above a specified price (called the limit price).

A limit order is an order to a broker to buy a specified quantity of a security at or below a specified price, or to sell it at or above a specified price (called the limit price). This ensures that a person will never pay more for the stock than whatever price is set as his/her limit. This is one of the two most common types of orders, the other being a market order.


Limit orders typically cost more than market orders because there is more work involved for the broker. Despite the high commission, limit orders are great because when the trade goes through, investors get their specified purchase or sell price.




Limit orders are especially helpful with low-volume or highly volatile stock. Low-volume stocks include those from smaller companies whose stock is not traded in great numbers. Because of the low volume, these stocks can easily become artificially elevated or depressed, and a market order could catch an investor in one of these heights or slumps. Therefore, a limit order would work much better in such a case because the investor can control how much he or she spends.

When placing a limit order, remember that unlike a market order, your order may never be executed if the price of the stock doesn't ever match the limits you have set, but if it is executed you will be guaranteed a price within the parameters you have set.

For example, let's say you want to buy 50 shares of ABC stock at no more than $50 per share. If the price falls to $50, your broker will attempt to buy it for you, but if the price goes up immediately afterwards, you might miss out.

In the same vein, you might want to sell your stock if it goes up to $60, so you place a limit with your broker: sell at $60. You don't know when or if this will happen, but you'll be guaranteed that it won't sell for less than $60.

Limit orders that are not immediately executed are placed in a queue for possible later execution. An order's priority in the queue is determined by its price and when it was placed in the queue. Orders with lower prices are placed before orders with higher prices. Earlier orders are placed before later orders. Limit orders in the queue will remain there until they have been placed, expire, or are removed by the trader who originally placed them.

Note that not all brokerage firms charge a higher commission to execute limit orders. Some charge the same prices for market orders and limit orders.

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