Updated on August 8th, 2019
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A limit order allows you to buy or sell a security like a stock at a specific price.
When buying with a limit order, you set the maximum price you are willing to buy a stock for, along with how many shares of the stock you wish to buy. For instance, if you were looking to buy 1 share of Kevin’s Airplane Company at $40 a share but the current stock price was $50, you could place a limit order for 1 share with a limit price of $40. If the stock price of Kevin’s Airplane Company drops, your broker will buy it on your behalf. If the stock never drops to $40 a share, your order will not be executed.
Similar rules apply to selling with a limit order. With a sell limit order, you specify the minimum price you are willing to sell a stock for and how many shares of the stock you wish to sell. For instance, you buy 1 share of a stock at the current stock price of $60, but you believe the stock price will peak at $70 in the near future. At this price, you want to sell the stock and receive your profit. You could place a sell limit order for 1 share at a limit price of $70. If the stock price rises like you predicted and another trader is willing to buy your share at $70, your broker will sell your stock to them and give you the cash. If the stock never rises to $70, your order will not be executed and you will still own the stock.
Limit Orders also can be filled fully, partially, or not at all depending on how many shares are available at the time of purchase. This means if you are wanting to buy 10 shares of a stock at $10 a share, but only 5 shares are available at that price, your limit buy order will tell your broker to buy those 5 shares and wait until another 5 are available for purchase at your limit price.
Unlike a market order, a limit order’s main benefit is that it gives you full control over the price you are trading at! This control allows you to get specific prices for your stocks and prevent slippage caused by market orders. In the long run, using limit orders increase trading accuracy and can positively affect how much profit you earn as an investor. This is why limit orders are generally recommended over market orders for investors who wish to minimize slippage and are not worried about whether their trade is executed or not.
Stocks: The Basics