What is a Limit Order?
A limit order is an instruction to buy or sell a security at a specific price or better. Unlike market orders that execute immediately at current prices, limit orders only execute when the market reaches your specified price, giving you control over execution price.
How Limit Orders Work
Buy Limit Order
- Sets the maximum price you’re willing to pay
- Executes at limit price or lower
- Placed below current market price
Sell Limit Order
- Sets the minimum price you’re willing to accept
- Executes at limit price or higher
- Placed above current market price
Limit Order Examples
Buy Limit Example
- Current price: $100
- You set buy limit at: $95
- Order fills when price drops to $95 or below
Sell Limit Example
- Current price: $100
- You set sell limit at: $105
- Order fills when price rises to $105 or above
Market Order vs. Limit Order
| Factor | Market Order | Limit Order |
|---|---|---|
| Execution | Guaranteed* | Not guaranteed |
| Price | Not guaranteed | You choose |
| Fill Speed | Immediate | May take time |
| Best For | Urgency | Price control |
| Risk | Price slippage | Missed opportunity |
*If market is open and stock is trading
Types of Limit Orders
Time-in-Force Options
| Type | Duration |
|---|---|
| Day Order | Expires at market close |
| GTC (Good Till Cancelled) | Remains until filled or cancelled (usually 30-90 days) |
| IOC (Immediate or Cancel) | Fill immediately or cancel entire order |
| FOK (Fill or Kill) | Fill entire order immediately or cancel all |
When to Use Limit Orders
Good For:
- Setting entry points: Buy stocks at desired prices
- Taking profits: Sell when targets are reached
- Illiquid stocks: Avoid wide spreads
- Volatile markets: Control execution prices
- Large orders: Prevent moving the market
Less Ideal When:
- Urgency required: Need to trade now
- Fast-moving stocks: May miss opportunity
- Very tight spreads: Minimal benefit over market orders
Limit Order Strategy Examples
Buying on Dips
- Stock at $100, you want to buy cheaper
- Set buy limit at $95
- If stock drops to $95, you automatically buy
Taking Profit
- Bought stock at $50
- Set sell limit at $75 (50% profit target)
- If stock reaches $75, automatically sells
Bracket Orders
Combine limit orders:
- Buy at $100 (current price via market)
- Sell limit at $120 (profit target)
- Sell stop at $90 (loss limit)
Partial Fills
Limit orders may fill partially:
| Scenario | Result |
|---|---|
| Order: Buy 1,000 shares at $50 | |
| Available: 400 shares at $50 | 400 shares fill |
| Remaining: 600 shares | Waits for more availability |
You may have open positions with unfilled portions.
Limit Order Risks
1. No Execution
If price never reaches your limit, order never fills.
2. Partial Execution
May only get some of your shares.
3. Missed Opportunities
Stock may rally without you if limit is too low.
4. Price Gaps
Stock may gap past your limit (especially good for sells, bad for buys).
Bid-Ask Spread and Limit Orders
Using limit orders to minimize spread costs:
| Order Type | Execution |
|---|---|
| Market buy | Pays the ask (higher) |
| Limit buy at bid | May fill at bid (lower) |
Potential saving = spread × shares
Advanced Limit Order Types
Limit-on-Open
Executes at open if price is at or better than limit.
Limit-on-Close
Executes at close if price is at or better than limit.
Pegged Orders
Automatically adjusts with market (bid/ask peg).
Tips for Using Limit Orders
- Research support/resistance levels for strategic placement
- Don’t set limits too far from current prices
- Monitor GTC orders - market conditions change
- Consider spreads when setting limits
- Use for entries rather than urgent exits
Related Financial Terms
This glossary entry is for educational purposes only and does not constitute investment advice.