Limit orders are used by customers who care about the price they receive. Unlike market orders, limit orders guarantee the transaction price will be at a specific price or better. However, they don’t guarantee execution. Let’s walk through a few examples.
Buy 100 shares of ABC stock @ $50 limit
Trading tape: $51.03… $51.01… $49.99… $49.98… $50.01…
The investor wants to buy 100 shares of ABC stock but won’t pay more than $50 per share. A buy limit order executes only when the stock trades at $50 or lower.
The trading tape shows available prices for the security, read from left to right. The first price that meets the order’s condition (at $50 or below) is $49.99, so the order fills at $49.99.
Investors use buy limit orders to try to get a better price. For example, if the stock is currently $55, a customer could enter a buy limit at $50. If the price drops and the order executes, they buy the stock for $5 less per share. If the price never falls to $50 or below, the order won’t execute.
Let’s see if you can answer a buy limit order question.
Buy 100 shares @ $75 limit
Trading tape: $75.02… $75.03… $74.97… $75.00… $75.01…
At what price does the order go through?
Answer = $74.97
Buy limit orders fill at the limit price or lower. $74.97 is the first price on the tape that’s $75 or lower.
Here’s a video that dives further into buy limit orders:
Let’s look at a limit order from the sell side:
Sell 100 shares of XYZ stock @ $70
Trading tape: $69.95… $69.98… $69.99… $70.01… $69.99…
Even though the word “limit” isn’t shown, it’s assumed to be a limit order when a price is specified and no other order type is stated.
This is a sell limit order. The customer wants to sell 100 shares of XYZ stock at $70 or higher. A sell limit order executes only when the stock trades at the limit price or above.
On the trading tape, the first price that meets the condition (at $70 or above) is $70.01, so the order fills at $70.01.
Let’s see if you can answer a sell limit order question.
Sell 100 shares @ $30
Trading tape: $30.05… $30.02… $29.99… $29.97… $30.01…
At what price does the order go through?
Answer = $30.05
Sell limit orders fill at the limit price or higher. $30.05 is the first price on the tape that’s $30 or higher.
Here’s a video that dives further into sell limit orders:
Limit orders may take time to execute because the market has to reach the specified price. Because of that, limit orders are often entered with a time-in-force instruction:
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