What Is a Limit Order?

Today's investors are used to thinking of stock market orders as immediate. However, there are at least three different types of orders: limit, market, and stop loss. How do you know which kind of order aligns with your risk strategy?

Let's start by dissecting limit orders.

What is a limit order?

A limit order is a specific order type that allows an investor to buy or sell a security at a particular price.

For buy limit orders, the order usually executes at the limit price or lower.

For sell limit orders, the order usually executes at the limit price or higher. This strategy allows investors control over the prices of the securities they trade.

Investors using a buy limit order are guaranteed to pay the price listed or less. However, it’s important to note that even though the purchase or selling price is secured, the order fulfillment is not—limit orders are not executed until the security price meets the order qualifications.

If the security does not meet the intended price, the order goes unfulfilled.

Limit order vs. market order

Market orders are real-time trading transactions meant to execute as quickly as possible at the current market price. They offer a higher likelihood (compared to limit orders) that an order will go through. However, just like limit orders, it’s entirely dependent on order availability (including timing, order size, and stock liquidity).

You should note that market orders can still be placed after trading hours are over, but they won't be filled until the following day (market hours are 9:30 am – 4:30 pm US Eastern Time). Market orders are subject to price fluctuations between when the order is received vs. when it is executed.

Meanwhile, limit orders set the maximum or minimum price you are willing to pay to complete the transaction, whether buying or selling. Before placing a buy limit order, an investor must indicate a maximum acceptance buy price. For sell limit orders, investors choose minimum acceptable sales prices.

Limit order vs. stop loss

A stop-loss order occurs when you want to buy or sell a security when the asset reaches a specific price. When a certain stock price falls to the designated “stop” price, the order becomes a market order, and it executes at the next available price. These order types limit investor loss on a security and differ from limit orders.

By contrast, a limit order triggers once the price drops below the stop price. Still, the order may not execute due to the value of the order limit.

Since limit orders can guarantee a price limit with no guarantee of trade execution, this can cause the investor a considerable loss if the order does not get filled before the market price drops through the limit price.

Fine-tuning your knowledge about price gaps

Price gaps are instrumental when making profits on the market, and they occur when share prices increase or decrease sharply, with no trading occurring between these two phases. Price gaps can be caused by external factors, such as a change in an analyst’s outlook or a news release.

When placing your order types, consider the price gaps on your limit and stop-loss orders, as well as market conditions for regular market orders.