What is a Limit Order?

A limit order, like a market and stop order, is among the favorites of traders. Those who are willing to wait and buy stocks at the most favorable price often use it.

A limit order allows traders to buy or sell an asset at a specified price.

By placing such an order, a trader sets the highest price at which they are willing to purchase the asset and the lowest price at which they are willing to sell it.

To stop a limit order from executing, the investor either cancels it manually or sets an expiration date for it.

It's evident that this type of order is an ideal choice for traders who want to keep their trading under control. But there are risks, i.e. the transaction may not occur. 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 ideal as the trader envisioned it, 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, meaning that they need to determine the limit price at the time of placing the trade request. 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 price better than the current one.

And, of course, such an order is suitable for those who do not want or cannot 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 won't allow them to do so, and the transaction may be missed.