A limit order 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.
Limit Orders
A limit order is not guaranteed to execute. Unlike a market order, which will fill at the best available price, a limit order will only fill if the security reaches the specified limit price. Because of this, there is the potential for partial fills on large limit orders. Execution certainty is why market orders are typically used for small orders.
For example, let’s say you wanted to buy shares of XYZ stock which was currently trading at $50 per share, but you didn’t want to pay more than $51. If you placed a limit order to buy 1,000 shares of XYZ stock at $51 per share, your trade would only go through if the stock reached that $51 level. If the stock never traded at $51 or above, your order would not be filled.
There are two types of limit orders: day and GTC (good-till-canceled).
Day limit orders expire at the end of the trading day if they are not filled and must be re-entered if you still want the order to execute. GTC limit orders remain in effect until they are canceled by the trader or until they are executed.
GTC orders are often used when anticipating a breakout or breakdown in price and do not want to miss the move.
It’s also important to note that most brokerages will charge you a fee for placing a GTC order.
In conclusion, a limit order is an instruction to buy or sell a security at a specific price or better. Limit orders give traders more control over their entries and exits, but there is no guarantee that the order will be filled. There are two types of limit orders: day and GTC (good-till-canceled). Day limit orders expire at the end of the trading day if they are not filled and must be re-entered if you still want the order to execute. In contrast, GTC orders remain in effect until they are canceled by the trader or until they are executed.