Understanding Limit Orders
A limit order is a directive to buy or sell a security at a specified price or better. Unlike market orders, which execute immediately at current prices, limit orders provide control over trade execution prices.
Types of Limit Orders
- Buy Limit Order: Executes only at the limit price or lower.
- Sell Limit Order: Executes only at the limit price or higher.
Key Benefits:
✔ Guaranteed price execution (or better)
✔ Protection against volatile price swings
✔ Flexibility with expiration dates (e.g., "good 'til canceled")
How Limit Orders Function
Traders use limit orders to set predefined entry/exit points. For example:
- Buy Scenario: XYZ stock trades at $17. A buy limit at $14.50 triggers only if the price drops to $14.50 or below.
- Sell Scenario: A sell limit at $20 for XYZ shares activates only if the price reaches $20 or higher.
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Limit Order vs. Market Order
| Feature | Limit Order | Market Order |
|-----------------|--------------------------------------|----------------------------------|
| Price Control | Yes (set price) | No (current market price) |
| Execution | Only at specified price | Immediate |
| Fees | Often higher | Typically lower |
Pro Tip: Use limit orders in volatile markets to avoid unfavorable fills.
Real-World Example
A portfolio manager wants to:
- Buy Tesla (TSLA) below $650/share. Places a buy limit order for 10,000 shares.
- Sell Amazon (AMZN) above $2,750/share. Sets a sell limit order for 5,000 shares.
Orders remain active until executed or canceled.
FAQs
1. Why didn’t my limit order execute?
- The market price never reached your limit price.
- Insufficient liquidity at your price point (common for low-volume stocks).
2. Can I cancel a limit order?
Yes, you can cancel unfilled limit orders anytime before execution.
3. How long do limit orders last?
Depends on broker settings:
- Day-only: Expires at market close.
- Extended: 30–90 days or "good 'til canceled."
4. What’s a stop-limit order?
A hybrid order combining stop-loss and limit features. For example: Sell AMZN at $15 *only if* it drops from $20 to $16 first.
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Key Takeaways
- Precision Trading: Lock in desired buy/sell prices.
- Risk Management: Avoid slippage during volatility.
- Automation: Execute trades without constant monitoring.
Bottom Line: Limit orders empower traders to strategically enter/exit positions while mitigating unexpected price fluctuations.