What is Limit order and how does it works?

A trader should always try to obtain the highest price when placing an order on the stock market. A buyer wants to purchase a stock at a low price and a seller wants it to sell for the highest possible price.

There are many techniques and methods that can be used to manage stock market trades. A 'limit order' is one of the most important tools to make investing a success. Limit orders are a very important tool to help you avoid portfolio damage due to wild price swings.

What's a Limit Order?

Limit orders allow investors to buy or sell stock at a specific price or better. Limit orders for buys will be executed at or below the limit price. Selling limit orders will not be executed at or above the limit price. This allows traders to control the price at which they wish to execute transactions, and ultimately this will show in their trading performance.

A buy limit order guarantees that the buyer will pay the stock price or less. The price is guaranteed but the filling and execution of the limit orders is not.

Stock limit orders cannot guarantee 100% execution. Buy limit orders are executed chronologically. It is not necessary for a buyer to find a seller at the limit. The order will be cancelled if the asset is not sold at the price specified.

This is possible with a market or, which allows the order to be executed quickly at the current market price and without any price caps.

Let's simplify the concept of limit order with an example.

Buy Limit Order

Let's say you decide to purchase 100 shares in an ABC company. The maximum price you are willing to pay is Rs. 25.50 per share This scenario would see you choose a limit buy option.

Buy 100 shares ABC, limit 25.50

This limit order says to the market that 100 ABC shares will be purchased. However, you must not pay more than Rs. 25.50 per share

Limit orders can not be absolute. Your limit order to buy ABC shares at Rs. You can benefit if the price of the stock falls below that limit. If the stock price falls below the set limit, you may be able to benefit. However, if it does, and the limit price is not met, the trade will not execute. The funds for the purchase will still remain in your trading accounts.

Limit Order

A sell limit order works in the same way. You can place a limit order of Rs. 25.50. It won't be executed at less than this price.

Limit 25.50

Your buying stock will not be sold at a price below Rs. 25.50 per share If the stock price goes above Rs. You could receive more stock if the stock price rises above Rs. 25.50 before you order is executed. The trade will not be completed and the stocks will remain on your demat account, If the stock price drops and your limit price isn't reached.

When is it appropriate to place a limit order?

Limit orders can be placed even if you're not in a rush to buy or sell stock. Limit orders cannot be executed immediately. You will need to wait until the ask price or bid price has been reached before placing limit orders. Limit orders are usually placed at major resistance or support levels. This allows you to obtain the best selling and buying prices. To get a lower average cost, you can divide your buy/sell orders into smaller limit orders.

It takes experience to determine the best price ranges. You can risk placing a buy limit order that is too low. This could cause it to not be executed. The same holds true for sell limit orders. After some time, you'll find the spot that gives you the best stock price and ensures your order is executed.

What are the advantages of Limit Order?

Limit orders have the advantage that you can place orders at the maximum price you wish to open or close your positions. If the stock price exceeds that level, the trade is executed. Limit orders enable you to execute a tarde at a specified level without needing to monitor the asset's price constantly.

Limit orders can be placed either after or before market hours. Some brokers allow limit orders for buying and selling stock before and after hours. If the order is not filled in the next trading session, it will be automatically cancelled.

What are the potential risks associated with Limit Order?

Limit orders pose the greatest risk because execution may not be possible. Stock prices could never reach the limit you specified. This means that if you have a particular position you need to close, or open, there is a possibility of it not being completed, which could impact your trading plan.

The Bottom Line

Although limit orders can be a great way to avoid missing trading opportunities, they are not foolproof. It is important to realize that even though limit orders can protect you against extreme loss, they may also prevent you achieving unanticipated gains.

Limit orders, such as the one above, can cause you to lose additional profits or stock in a highly volatile market environment. They may not be filled quickly enough.

If you wish to purchase or sell stock, set a limit that is not affected by daily price fluctuations. You should ensure that the limit price is set at a level you are happy with. You should still have some control over the selling and buying prices.