A limit order is an order to buy or sell a specific security at a price that is specified, or at a price that is better than that price. Limit orders, as opposed to market orders, give the investor the ability to determine their own parameters for when they would like their trades to be executed. This effectively gives them the ability to “limit” the amount that they are willing to pay (or receive) for a particular investment. Market orders do not give the investor this ability.
Limit orders can be used in buying positions as well as selling positions, and they give investors the ability to choose specific price points and/or amounts of shares for each transaction. Limit orders can also be used in both buying and selling positions. For instance, if an investor wanted to buy 500 shares of Google at a price of $1,200 per share, they could place a “limit order” specifying that exact price as a parameter for execution. This would ensure that their purchase would be carried out at the desired price.
In addition, the investors have a greater degree of control over the amount of time their trade will remain active before it is automatically canceled by the broker when they use this kind of order. The timeframe can be as short as seconds or minutes and as long as several weeks or even months, depending on the preferences of the investor as well as the conditions of the market at the time.
When using limit orders, there are some inherent risks involved, particularly in relation to volatility, just as there are risks involved when engaging in any activity that involves capital markets. Because it takes longer for certain types of trades to clear, prices may move significantly in either direction during this period, which could result in lower potential gains (or higher losses) than were initially anticipated. In addition, if an excessive number of buyers or sellers become involved in a particular security via these orders, it can lead to disruptions on major exchanges as a result of the sudden influx of trades trying to settle at the same time.
When it comes to trading stocks, having a general understanding of how limit orders function and the kinds of circumstances that they are ideally suited for can help stock investors make successful trades at prices that meet their expectations. In addition, investors are able to determine which course of action is the most appropriate when it comes to placing trades on particular securities by comparing the costs and risks that are associated with placing unprotected orders to those that are incurred as a result of using limit orders.
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