What is a Limit order?
In our last lesson we continued our module on how to place stock trades, with a look at how to open a trade using a market order. In today’s lesson we will continue this discussion, with a look at how to open a trade using a limit order. Unlike a market order, which is sent to be executed at the best price available in the market at the time the order is placed, a limit order is sent to be executed at a specific price or better. The advantage of a limit order, is that you have price certainty, meaning that you know that the worst price where your order will be filled, is the price you specify in the order. If the market moves so that you would be filled at a price that is worse than the price that you have specified, then the trade will not execute. If however the market moves so that you would be executed at the exact price you have specified or better, then the trade will be executed. To see an example of this, lets login to our ThinkorSwim papertrading platforms and place a trade us
When you instruct your broker to buy shares for you at or below a certain price, or sell shares at or above a certain price, you’ve entered a limit order. Limit orders reduce the risk that an order will be filled at a price you don’t like, and best suit the investors’ interests in volatile markets. The down side, of course, is that by waiting for your price the stock you want gets away from you, or the stock you want to unload just keeps falling. The opposite of a limit order is a market order, in which the broker is instructed to execute the trade at any market price available.
A Limit Order is a Buy or Sell Order of shares at a specified price, or better. In this case, the order will not be completed at a price higher for a Buy Order or lower for a Sell Order than the specified price. While this type of order offers the investor some security in the cost of the transaction, it also narrows the possibility of an executed order. An investor would commonly use this type of order if he wants to achieve a targeted price during a specified time period.
