Limit Order
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A limit order is an instruction to buy or sell only at a specified price or a more favorable price. Unlike a market order, it gives us price control, but execution is not guaranteed.
Buying With a Limit
A buy limit order specifies the maximum price we are willing to pay. It can execute at that price or lower if matching liquidity is available.
Selling With a Limit
A sell limit order specifies the minimum price we are willing to accept. It can execute at that price or higher if matching liquidity is available.
The Trade-Off
Limit orders exchange execution certainty for price control. The order may remain unfilled, partially fill, or expire/cancel according to the order’s instructions and venue rules.
Example
If a stock trades at 100 and we place a buy limit at 98, the order will not normally execute at 100. It requires available matching liquidity at 98 or a lower price.
Key Terms
Limit order, limit price, execution, partial fill, liquidity.
Knowledge Check
- What does a buy limit specify?
- Does a limit order guarantee execution?
- What is the basic trade-off between a market order and a limit order?