What is a Limit Order?

When it comes to investing in stocks, there are a variety of order types that can be used to place trades. One of these is a limit order, which is an order to buy or sell a security at a specified price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Thus, a limit order is not guaranteed to be executed.

How Does a Limit Order Work?

To place a limit order, the investor will specify the limit price they are willing to pay (for a buy order) or accept (for a sell order). The order will then be submitted to the market. If the market price reaches the limit price, the order will be executed.

Limit orders can be used to take advantage of price discrepancies between exchanges, or to avoid paying fees for market orders. They can also be used to protect profits or limit losses.

For example, let’s say an investor wants to buy shares of ABC Corporation. The shares are currently trading at $10.00, but the investor is only willing to pay $9.50. The investor could place a limit order to buy the shares at $9.50. If the shares fall to $9.50, the order will be executed and the investor will buy the shares. However, if the shares never reach $9.50, the order will not be executed.

Similarly, an investor could place a sell limit order at $10.50. If the shares rise to $10.50, the order will be executed and the investor will sell the shares. However, if the shares never reach $10.50, the order will not be executed.

Limit orders can be placed for both stocks and options.

Why Do You Use Limit Orders?

A limit order can be used to take advantage of favourable pricing and to protect against unfavourable pricing. For example, assume you want to buy shares of XYZ stock priced at $50, but you are willing to buy the shares at $49 if the price falls. Then, you would place a limit order to buy at $49. If the price of XYZ stock falls to $49, your order will be executed, but if the price remains at $50 or higher, your order will not be executed.

Similarly, a limit order can also be used for selling stocks as well. For example, assume you own shares of XYZ stock that you bought at $50, and you want to sell the shares if the price rises to $52. You would place a limit order to sell at $52. If the price of XYZ stock rises to $52, your order will be executed, but if the price remains at $51, your order will not be executed.

A limit order can be useful because it ensures that you will not pay more than you are willing to for security or sell for less than you are willing to. It may also help you get a better price than what is currently being offered in the market.

However, there are some drawbacks to using limit orders. If the stock price moves quickly and your limit order is not executed, you may miss out on potential profits. There is also the risk that your limit order will not be executed at all if the stock price does not reach your limit price.

Limit orders are not free, and the cost is typically based on the number of shares you want to buy or sell. For example, assume you want to buy 1,000 shares of XYZ stock at $50. If the commission is $8.95 per trade, your cost would be $8.95.

How Long Can Limit Orders Last?

A limit order can be specified with a time-in-force designation, which indicates how long the order will remain active. The most common time-in-force designation for a limit order is “good-til-cancelled”, which means the order will remain active until it is executed or cancelled by the customer.

Other time-in-force designations include “day,” “good-til-date,” and “immediate-or-cancel.”

“Day”, or Day Order (DAY), remains active only within trading sessions (between the opening and closing days of an exchange market). “Good-til-date” remains active until a particular date of choice. “Immediate-or-cancel” order is based on the availability of the stock at the exact time of the order.

If you’re interested in using limit orders for stocks in your portfolio, sign up for Gratis today and be one of the first to download the Gratis app when it is available in your region!

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Investing in financial instruments can entail a number of risks which can lead to losses of your capital, please see our Risk Disclosures

The value of an investment in stocks and shares can fall as well as rise so you may get back less than you invested. Past Performance is no guarantee for future results

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