Limit orders exist for customers concerned about prices. Unlike market orders, limit orders guarantee transactions will occur at a specific price or better. However, they do not guarantee execution. Let’s work through a few examples.
The investor wants to purchase 100 shares of ABC stock, but is unwilling to pay more than $50 per share. Once the stock is trading at that price or below, the order executes. The trading tape reflects available prices for the security, in order from left to right. $49.99 is the first price available at $50 or below, so the order will fill at that price.
Investors use limit orders to seek better prices. For example, if the stock’s price is $55, a customer could place a buy limit at $50. If the order executes, they purchase the security for $5 cheaper per share. However, the order will only execute if the price falls.
Let’s see if you can answer a buy limit order question.
Although the word ‘limit’ is not there, it’s assumed to be a limit order if a price is specified and nothing else. This is a sell limit order, where the customer requests a sale of 100 shares of XYZ stock at $70 or higher. Once the stock is trading at that price or above, the order executes. With the trading tape provided, the order fills at $70.01, the first price at $70 or above.
Let’s see if you can answer a sell limit order question.
Sell limit orders fill at the price specified or higher. $30.05 is the first price available that’s $30 or higher.
Here’s a video that dives further into sell limit orders:
Timeframe
Limit orders often take some time for them to execute. Therefore, limit orders can be day orders that cancel at the end of the day if they remain unexecuted, or GTC orders that are canceled when the customer requests.
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