What is a limit order in Trading and How does it work?

limit order in Trading

For a trader, getting the best price while placing an order on the stock market is essential. A seller wants to sell a stock for as much money as possible, and a buyer always seeks to purchase a stock for as little money as possible. 

Therefore, there are many ways and approaches for handling stock market transactions that may help you to maximize profit and minimize loss. One of the best tools for creating successful investment strategies is a "limit order". Limit orders are frequently employed because they shield your portfolio from losses brought on by unjustified price movements. 

Limit order in the financial markets specifies the price at which a stock or other security should be purchased or sold. A condition like this provides dealers more control over the prices at which they can trade. Either a purchase or sell order may have a limit:

• Only at the limit price or a lower price will be used to fulfill a purchase limit order.
• Only at the limit price or a greater one will a sell limit order be carried out.

Order fulfillment is not assured, but the price is. Limit orders won't be completed unless the price satisfies the order's specifications.

A market order, which directs a trade to be carried out at the current market price without any price limits stated, is an alternative to a limit order.

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How does limit order work?

A limit order is one that uses a specified price to buy or sell shares. For instance, if a shareholder decides to purchase 500 shares of XYZ Company, his maximum acceptable price is Rs.30.50. If he wants to sell shares of XYZ Company with Rs. 30.50 limitations, he won't sell any shares until the price is Rs. 30.50 or above.

When utilizing a buy limit order, the shareholder is guaranteed to pay the purchase limit order price or greater, but there is no guarantee that the order will be honored. A trader who is hesitant to use a market order during times of high volatility might have more control over the execution price of an asset by utilizing a limit order. 

When a stock is rising or dropping sharply and a trader is concerned about receiving a poor fill from an exchange order, they can decide to use a limit order. 

A limit order can also be helpful if a shareholder has a specific price in mind at which they are willing to buy or sell an asset but is not actively monitoring a particular stock. Limit orders may also be opened with a deadline.

When should a Limit Order be placed?

Limit orders are very useful when you're not in a rush to acquire or sell stocks. You must wait until your ask price or your bid price is achieved before the limit orders are executed. Limit orders are often set on significant resistance and support levels, giving you the opportunity to achieve the best possible buying and selling prices. To obtain an accurate average cost, you may also break buy/sell orders into several smaller limit orders. 

In addition, it requires some knowledge to determine when or where to place the limit pricing. It would be useless to put a purchase limit order too low since it might never be filled. Sell limit orders work the same way. Once you get some expertise, you will discover the perfect spot that ensures your order is executed and offers you a higher stock price. 

Benefits of Limit Order 

The primary benefit of using a limit order is that you can specify the highest price at which you wish to initiate or cancel positions. The deal will be executed if the stock price hits that point. Limit orders thus allow you to execute a deal at a specified level without continuously monitoring the asset price. 

Additionally, limit orders may be submitted before or after market hours since certain brokers let limit orders for the purchase and sale of stocks to be submitted both before and after market hours. If the order is not filled in the following trading session, it will automatically expire. 

Potential Risks of Limit Order

The primary risk associated with limit orders is that there is no guarantee that they will be carried out because the stock price might never rise to the level you have set. In other words, you would run the danger of never fulfilling a certain position you needed to cancel or open, which may have an influence on your trading strategy. 

Conclusion

Limit orders could be the best approach to guarantee that you won't miss a trading opportunity, but they are by no means perfect. It's crucial to realize that the same mechanism that shields you from severe loss may also shield you from unexpected benefits in this situation.  

If you wish to purchase or sell a stock, set an order limit that is outside of or above daily price variations. Make sure the limit's price is set at a place where you are happy with the result. In any case, you ought to have some influence on the purchase and sale prices.