What is a Limit Order in Stocks?

January 25, 20237 min read
What is a Limit Order in Stocks?
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Key Takeaways

  • Limit buy orders set the most that investors are willing to pay for a stock.
  • The two limit order types are “buy limit” and “sell limit.”
  • The major risk is that an order might not be executed.

Using a limit order can help investors gain more control over their stock orders. Matching an order type to specific trade goals requires a full understanding of the different order types, in addition to why and when traders utilize them. Traders should also understand what factors affect order executions.

In short, a limit order can be the right call when an investor believes they can buy or sell at a price that is lower than the current quote. But there is more to it than that. The following explains what a limit order is and when and how to use it.

What is a Limit Order?

A limit order basically establishes the maximum amount an investor is willing to pay for a stock, or a minimum price they are willing to accept on a sale. In other words, when a limit order is placed, the investor is instructing their broker to purchase or sell stock shares only when the price is right.

The chief risk is that there is no guarantee the stock the investor wishes to buy or sell will reach the chosen limit price. A limit order prevents the investor from buying or selling at an amount that is higher or lower than desired.

Types of Limit Orders

There are two types of limit orders: “buy” and “sell.”

Buy order:

Such an order directs the broker to buy shares once a stock drops below a specific price, also known as the limit price.

Sell order:

With a sell order, the broker is permitted to sell shares only when the stock increases above an established limit price.

The investor gets to select a timeframe for their limit order. Such a period typically lasts anywhere from 24 hours to a month or longer. Thus, a limit order will process a trade at the limit amount exclusively within a set period, after which it will be voided.

Limit Order Example

Say an investor believes Tesla (TSLA) stock is going to fall under its current $210 per share. He or she could place a limit order with their broker to buy shares at $209. Here, the order would only be executed if the stock reaches $209 or less. If it does not, the order will not be processed.

How Does a Limit Order Work?

When trading stocks, it is crucial to understand that a limit order can protect investors from paying more for a stock than intended or selling for less than desired.

A limit order gives investors more control over a security’s execution price, particularly if they are wary of employing market order (explained below) during periods of high volatility.

Limit Orders and Price Gaps

A buy limit order will not get filled if the stock’s price rises above the order’s stated price. That is because the limit price is the most the investor is open to paying. In the case of a gap, the stock price would then fall below the market price.

When Should You Choose a Limit Order?

A limit order might be the better option if:

  • When an investor does not want to monitor the market. Placing a limit order can relieve worry about timing the market just right.
  • When an investor wishes to lock in a desired price. Limit orders might be the best option if the investor has a certain price in mind to purchase or sell a stock.
  • When an investor is trading a large number of sales. A limit order can help skirt “slippage,” the difference between the price the investor expects to pay for a stock and the price actually paid.
  • When the investor wants to trade stock that is infrequently traded. For example, using a market order to purchase stock in a small, minimum-volume company can take some time to fill. Here, a limit order can help the investor get the price they want.

How Do You Place a Limit Order?

The first step is to set the limit price for the security the investor wishes to buy. Depending on how their securities are traded, investors can do this online or by calling their brokers. If trading is done online, there will be a platform tab that will facilitate a limit order. Otherwise, the investor simply tells their broker to place such an order at a certain limit price for a specific duration. The investor then can check to see whether the order was filled.

Who Can Place a Limit Order?

Investors either set a limit online or instruct their brokers to execute a trade – but only at the price specified or better.

Limit Order vs. Other Order Types

Limit order vs. Market order

The two most common order types are “limit” and “market.” Typically a brokerage’s default order type, a market order directs a broker to buy or share stock shares at the best available price. Contrary to limit orders, market orders are guaranteed to execute. However, the transaction price might end up being higher or lower than it was when the order was placed.

As an example, perhaps an investor wishes to purchase Disney (DIS) stock, which was trading at $107 per share on Feb. 15, 2023. Thus, placing a market order for 10 shares of DIS means the broker would immediately purchase the stock at the best price possible. If Disney’s stock price rises before the order is processed, the investor might wind up paying more than $107 per share.

Limit Order vs. Stop Order

A stop order adds another layer to a requirement that a certain price be met. For example, a limit order to sell one’s security for $15 will process when the market price hits $15. By contrast, a stop order can be placed to sell the security for $15 – only if the share price has fallen from $20 to $16.

Stock Market Alternatives

With the stock market, the never-ending challenge is getting the right price. While using limit orders can help in that regard, the market is inherently volatile. That is why investors are increasingly diversifying their portfolios with alternative investments that are not directly tied to public markets.

Take Yieldstreet, for example. With curated offerings including art and real estate, the online investment platform helps investors generate passive income while creating a more modern portfolio. Yieldstreet’s opportunities carry various yields, durations, and minimums.

The overall objective is to blend traditional investments such as stocks and bonds with those that are not dependent on the stock market.

Diversification and Alternative Investments

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

If investors are strategic in terms of how they are used, limit orders can potentially maximize profits. However, such orders can also present risks since they do not guarantee the stocks will be traded, potentially resulting in missed opportunities.

Stock values constantly fluctuate, rendering it a challenge to buy or sell at the desired price. That is why seasoned investors and financial experts widely recommend offsetting stock market volatility with a portfolio diversified by alternatives.

All securities involve risk and may result in significant losses. Diversification does not ensure a profit or protect against a loss in a declining market. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.