What is a Limit Order?

Jun 11, 2018 | BEGINNER, INVESTING 101

A limit order is an order to buy or sell a stock at a specific price. A buy limit order initiates a purchase at a set price or below. A sell limit order sells stock for a set amount or higher.

Unlike a market order, in which investors purchase stock at the current market price, buy limit orders allow you to set a price at which you want to buy a stock. If the stock reaches that price, a market order is initiated and shares are purchased at the price set by the limit order.

The same applies to a sell limit order. After you set a sell limit order, the shares will only be sold when market price reaches that number and a buyer agrees to buy for the sell limit price.

Limit orders allow investors to take advantage of market volatility and help you avoid paying more than you want for a stock or selling for less than you’d like.

Of course, there are limitations. If you set the limit price too high on a sell limit or too low on a buy limit, the order can be canceled and investigated.

Some brokerages also charge higher commissions on limit orders which can cut into your profits, so be sure to check with your brokerage before attempting to set limit orders.

Another factor to consider is that when setting a limit order, execution is not guaranteed. Because your stock will only be bought or sold if that set price is reached, it is possible – and likely – that the set price will not be reached and you will miss the opportunity to buy or sell when most advantageous.

Limit orders can be set up as day limit orders or good till canceled (GTC) limit orders.

Day limit orders are only good for the day in which they are set. For example, if I were to set a day limit order at the opening of the stock market today, it would automatically cancel at the end of today’s stock market hours.

A GTC limit order, on the other hand, is in effect until canceled. In other words, if I set a GTC limit order today, it will remain in effect until I cancel it or until the set price is reached and the stock is traded.

Some brokerages do set limits on GTC orders – 60-90 days for most brokerages. Of course, you can always initiate another GTC order if it is canceled by your broker.

Setting limit orders can eliminate some risk and stress for investors, but also carries its own set of risks. Investors should be sure they understand all risks before investing in the stock market.