A limit order in stocks is an order to buy or sell a stock at a specific price or better. It allows an investor to set a predetermined price at which they want to buy or sell shares:
- A buy limit order will only be executed at the limit price or lower. For example, if you want to buy a stock currently trading at $17 but want to buy it only if the price drops to $14.50 or lower, you set a buy limit order at $14.50. The purchase will only happen if the stock price reaches that level or better.
- A sell limit order will be executed only at the limit price or higher. For example, if you own shares and want to sell them when the price reaches $20 or higher, you set a sell limit order at $20.
Limit orders give investors more control over the price at which their trades are executed, unlike market orders that execute immediately at the current price without price limits. However, limit orders do not guarantee that the trade will be filled if the market price does not reach the specified limit price. Limit orders can also be set with an expiration date or remain valid until canceled or filled. In essence, a limit order helps protect investors from buying at too high a price or selling at too low a price, especially during volatile market conditions. But it involves the risk that the order might not be executed if the price target is not met. This makes limit orders a useful tool for investors who have a specific price in mind and do not need immediate execution of their trades. This explanation is based on definitions and examples from trusted financial sources.
