What is limit order?

Definition

A Limit Order refers to an instruction to purchase or dispose of a share at a predetermined price or higher, yet its execution is not assured.

Understanding a limit order

Limit orders give investors greater control over the prices they pay or receive when buying or selling stocks. Unlike market orders that execute immediately at the best available price, limit orders only execute when the stock reaches a specified price or better. With a buy limit order, investors can set a maximum price they are willing to pay for a stock, while a sell limit order allows them to set a minimum price they want to receive. If the stock price hits the limit price, the order is executed. This enables investors to avoid overpaying for a stock or selling it for less than desired.

Example

On August 29th, 2019, an individual who invests money sets a limit price of $200 for 100 shares of Apple. At the time, Apple's stock is trading at $207.76. If the stock decreases to $200 or less, the order will be executed. However, if the price fails to reach $200 within a certain timeframe, which could be a day or until the investor cancels the order, the order will expire and remain unfulfilled.

Gist

Similar to how eBay permits bidders to establish the highest amount they are willing to pay for an item in an auction, limit orders enable investors to set their maximum bids for a stock. For sellers, limit orders enable them to choose the minimum price they will accept for a stock, comparable to eBay's "reserve price." While limit orders are a valuable tool in an investor's arsenal, there is always a possibility that the stock may never reach the desired price, resulting in an unfilled limit order.