Limit orders explained

A limit order, like a market order and a stop order, is often used by traders. Particularly by those who are willing to wait and purchase stocks at the most favorable price.

A limit order is an ability to buy or sell security at a specified price.

By placing such an order, a trader sets the highest price at which they are willing to buy the asset and the lowest price at which they are willing to sell it. To stop a limit order from working, the investor either cancels it manually or sets an expiration date for it.

Obviously, this type of order is an ideal choice for traders who want to keep their trades under control. But there are risks - the deal may not go through. And this is the key difference between a market order and a limit order. In the first case, the transaction almost always goes through, but the price may not be as perfect as the trader envisioned, while in the second case, the price will be exactly what the investor expected, but the transaction is not always executed.

To use a limit order, a trader needs to set their conditions - the limit price at the time of placing the order. In other words, it can only be executed if the price reaches the specified limit.

A limit order works exceptionally well with volatile securities. Here, the investor can expect a better price than the current one.

And, of course, such an order is good for those who cannot or do not want to constantly monitor the progress of trading. But there is a flip side: if a trader is potentially ready to sell a security without being tied to a specific price, a limit order will not allow them to do so, and the deal may be missed.