Getting Started Building a Trading Career Tools and Resources Glossary - Backtesting
- Backtesting Depth
- Bear Market
- Bull Market
- Candlestick
- Charting
- Chart Patterns
- Day Trading
- Dividend Yield
- ETF
- Fundamental Analysis
- Leverage
- Limit Order
- Index Fund
- Margin Trading
- Market Capitalization
- Mutual Fund
- Market Trends
- Moving Averages
- Price-to-Earnings Ratio (P/E Ratio)
- Portfolio Diversification
- Positions in Prosperse
- Risk Management
- Scalping
- Short Selling
- Stock Alerts
- Stock Scanning
- Stock Screener
- Stop-Loss Order
- Support and Resistance
- Swing Trading
- Take Profit
- Technical Analysis
- Trend Lines
- Volatility
Glossary - Limit Order
Limit Order definition
An instruction to buy or sell a security at a specific price or better.A limit order is an instruction to buy or sell a security at a specific price or better. Unlike a market order, which executes at the current market price, a limit order will only be executed if the security reaches the specified price, known as the limit price. This type of order gives investors greater control over the price at which their trades are executed, but it may not be filled if the market price does not reach the limit price.
Use Cases
For example, if an investor wants to buy a stock but only at a price of $100 or lower, they can place a buy limit order at $100. The order will only be executed if the stock price drops to $100 or below. Similarly, a sell limit order can be used to sell a stock at a specific price or higher. Limit orders are useful in volatile markets or when an investor has a specific target price in mind.
Limit orders are often used by traders who want to ensure they do not overpay or undersell a security. However, there is no guarantee that a limit order will be executed, especially in fast-moving markets where prices may fluctuate rapidly.
Related Terms:
- Stop-Loss Order: An instruction given to a broker to buy or sell a security once it reaches a specified price, known as the stop price.
- Take Profit: An order placed by a trader to automatically close a position when a specified profit target is reached.
Frequently Asked Questions
What is a limit order?
A limit order is an instruction to buy or sell a security at a specific price or better. It ensures that a trade is executed at the desired price or more favorable, but there is no guarantee that the order will be filled if the market price does not reach the limit price.
How does a limit order work?
A limit order is placed with a specific limit price. For a buy limit order, the trade will only be executed at the limit price or lower. For a sell limit order, the trade will be executed at the limit price or higher. The order remains open until it is filled, canceled, or the time period for the order expires.
When should I use a limit order?
You should use a limit order when you have a specific target price at which you want to buy or sell a security. Limit orders are particularly useful in volatile markets, where prices can fluctuate rapidly, or when you want to avoid paying more than a certain price or selling for less than a specific amount.
What are the risks of using a limit order?
The main risk of using a limit order is that it may not be executed if the market price never reaches the limit price. In fast-moving markets, the price may touch the limit price briefly but not long enough for the order to be filled. Additionally, the order may remain open for an extended period, leading to missed opportunities or changes in market conditions.
How is a limit order different from a market order?
A market order is executed immediately at the current market price, with no guarantee of a specific price. A limit order, on the other hand, is only executed at the specified limit price or better. While limit orders offer price control, market orders offer immediate execution.
Can I cancel a limit order?
Yes, you can cancel a limit order as long as it has not been filled. If the order is partially filled, you may be able to cancel the unfilled portion. It's important to check with your broker for the specific process and conditions for canceling limit orders.
