What is a Limit Order?

A limit order refers to an order to buy or sell securities at a specific price range. The buy order takes place only when the market reaches the selected price or has a better price option. This provides investors with greater control over the executed price rather than immediate execution. The sell limit order, on the other hand, can take place only when executed at the limit price or higher. This article explains limit order meaning, how it works, and more.  
 

How Does a Limit Order Work? 

Here’s how a limit order works:  

• With a limit order, investors can easily set a specific price at which they may want to buy or sell a stock. 
• This order is then placed in the market and stays active until it is executed at the chosen price or cancelled. 
• A limit buy order is executed only when the market price falls to the set price or lower. 
• A limit sell order is executed only when the market price rises to the set price or higher. 

Here is an example for better understanding:  
Let’s say there is a company XYZ, trading at Rs 200 per share. An investor can buy the stock of this company only if the price comes down to Rs 190, as it may feel better value to the investor. So, the investor places a buy order at Rs 190.  

At the same time, there is another investors who holds the shares of the same company and wants to sell them, but only if the price goes up to Rs195. So, the investors places a limit sell order at Rs 195.  

What happens next: 

• If the market price falls to ₹190 or lower, then the limit buy order gets executed at the chosen price. 
• If the market price rises to ₹195 or higher, the other investor’s limit sell order gets executed. 
• If the price stays between ₹190 and ₹195, neither order is executed, and both remain pending until the price reaches the set levels, or the orders are cancelled. 

After explaining what is a limit order, the article further explains when a limit order should be placed.  

When Should a Limit Order Be Placed? 

The following are some conditions in which a limit order can be placed.  

• When the investor is not in a hurry to buy or sell and can wait for their preferred price. 
• An investor can place a buy order when looking for better control over the buying or selling price rather than immediate execution. 
• When placing orders near important support or resistance levels to get favourable prices. 
• When investors want to split a large order into smaller limit orders to achieve a better average price. 

Benefits of a Limit Order 

The following are the benefits of a limit order. 

• Allows investors to buy or sell securities at a specific price or better 
• Offers better control over the execution price compared to market orders 
• Helps avoid unfavourable price fluctuations in volatile markets 
• Useful for planning trades near support and resistance levels 
• Suitable for investors who are not in a hurry to execute trades 

After understanding what is a limit order in stock trading and its benefits, the article futher explains the risks of a limit order.  

Potential Risks of a Limit Order 

The following are the potential risks of limit order:  

• No Guaranteed Execution: The order may not get filled if the market price does not reach the specified limit level. 
• Missed Trading Opportunities: Prices may move quickly away from the limit price, causing investors to miss the trade entirely. 
• Partial Execution: In some cases, only a portion of the order may be executed due to limited market liquidity. 
• Requires Market Understanding: Setting an unrealistic limit price can reduce the chances of execution and requires experience to place effectively. 

Conclusion 

A limit order is a useful tool for investors who want better control over the price at which they buy or sell securities. By allowing trades to be executed only at a chosen price or better, it helps avoid unfavorable market prices and supports disciplined trading decisions when placed through a trading app. However, since execution is not guaranteed, limit orders are suitable for investors who can wait and are sure about their target price levels.