Search
LearnBlogCareersHelpLog InSign Up

What is a Buy Limit Order?

definition

A buy limit order allows investors to buy a stock at or below the price they set, giving them more control over how much they pay.

🤔 Understanding a buy limit order

A buy limit order lets investors buy shares at or below a specified stock price. That allows them to keep control over how much they pay. Investors give the order to a broker, who will only fill it if the stock falls to the set price or below during the time the order is in place. That means that although the price is guaranteed, the order may not get filled if the price doesn’t decline far enough or if there aren’t enough shares available to buy.

example

Let’s say a buy limit order is set at $15 for a stock trading at $17. The order will be filled only when the price drops to $15, so the investor is guaranteed that price or less. Now, let’s say the order expires in two days, and the stock only falls to $16 on the first trading day. The order will not be “triggered.” But the next day, the price of the stock opens at $13. Then the investor will get shares at $13, since that’s the first price available at or below $15. (This, by the way, is an example of a Good-til-Canceled (GTC) order.)

Takeaway

A buy limit order is like setting a strict household budget, but for buying stocks…

You have a fixed amount of money to spend every month, so you can only buy things that fit within that budget. If your budget is $500 and that sofa you’ve been eyeing costs $600, you would only be able to buy it if the price drops by $100 or more.

illo buy-limit-order desktop-mobile

Tell me more...

What are the different types of orders?
What is a market order?
What is the difference between a limit order and a stop order?
What are the different kinds of stop orders?
Can you share an example of a buy stop order and a sell stop order?
What is the difference between a buy limit order and a sell limit order?
Can you share an example of a sell limit order?
How long does it take for a broker to confirm a trade after it has been placed?
How does an investor get to know when a trade is confirmed?
What happens after an order is executed?

What are the different types of orders?

The most common types of orders are market orders, limit orders, and stop orders.

What is a market order?

A market order is the quickest, most basic type of order investor can place to buy or sell stocks. They can get the best available market price, since market orders take priority over other kinds of orders. They are typically executed immediately during regular and extended (before or after) trading hours. But bear in mind that not all stocks support market orders during extended trading hours. If the market closes without the order being filled, then it gets into a queue to be traded when the market reopens.

What is the difference between a limit order and a stop order?

Both limit orders and stop orders can be useful parts of an investor's toolbox because they provide more control over what stock price level will trigger a purchase or sale. But they work differently and can serve different purposes. Generally speaking, investors use limit orders when they want to have control over the execution price, but stop orders are often used to buy or sell when the market moves in an unexpected direction.

A limit order lets investors buy or sell at a set price (the “limit”) or better. Depending on whether investors want to go higher or lower than the set price, limit orders come in two flavors: buy limit order and sell limit order.

A stop order, aka “stop-loss order,” lets investors buy or sell a stock once the price reaches a specified level (the “stop” price). That helps investors minimize potential losses in case the stock moves in the wrong direction. When a stop price is reached, the stop order becomes a market order.

What are the different kinds of stop orders?

Similar to limit orders, stop orders also come in two varieties: buy stop orders and sell stop orders. If investors hope to purchase a stock at a lower price but don’t want to miss out on a buying opportunity if the price goes up, they can set a buy stop order above the current price. If the stock rises to the stop price, the buy stop order becomes a market order. If investors hope to sell their shares at a higher price but want to limit any potential losses if the price starts dropping, they can set a sell stop order below the current price. If the stock falls to the stop price, the sell stop order becomes a sell market order.

Can you share an example of a buy stop order and a sell stop order?

Buy stop order: Let’s say a stock is trading at $5 and an investor is hoping to buy it at a lower price. However, the investor also has a hunch that if the stock goes up to, say, $8, it may go even higher. To minimize potential costs, they can set a stop price at $8. If the stock rises to $8 or higher, the buy stop order becomes a buy market order and the investor can buy the stock at the best available price. But if the stock stays below $8, the market order won’t be triggered and no purchase will take place.

Sell stop order: Let’s say, a stock is trading at $7 and an investor is hoping to sell their shares at a higher price. If the investor also wants to shield themselves from a potential drop in price, they can set a sell stop order. Let’s say the stop price is set for $5. If the stock falls to $5 or lower, the sell stop order becomes a sell market order and the investor can sell at the best price available. If the stock stays above $5, no order is triggered and no transaction takes place.

What is the difference between a buy limit order and a sell limit order?

We’ve been learning about buy limit orders, which allow an investor to buy stocks at or below a set price. With a sell limit order, stocks can be sold at a specified price or higher. That allows investors to set a minimum amount that they can receive for each share they own.

Can you share an example of a sell limit order?

Let’s say, a stock is trading at $17, and an investor wants to receive at least $20 for each share they own. With a sell limit order, they can set a limit price at $20. If the stock rises to $20 or more, the shares will be sold at the market price. If the stock doesn’t rise to $20, the order won’t be executed and the investor will keep their shares.

How long does it take for a broker to confirm a trade after it has been placed?

Three factors help determine how long it takes to get confirmation that an order has been placed:

  • The type of order
  • How much trading activity there is in the stock
  • Whether the market is open

Typically, orders placed on the New York Stock Exchange or Nasdaq between 9:30 a.m. and 4 p.m. ET Monday to Friday are sent to the market right away.

Now, a market order in a liquid, or heavily traded, stock such as Twitter will almost always be filled and confirmed immediately. It may take longer to fill an order for stocks that are not very liquid.

A limit order could take longer to fill. And remember, with limit orders, a “fill” is not guaranteed. The same is true for stop orders.

Ultimately, the duration it takes to confirm a trade depends on how the bidding process plays out between the buyer and seller.

How does an investor get to know when a trade is confirmed?

When placing a trade with a broker online or over the telephone, ensure the trade has been executed and confirmed.

Brokers online have different trading platforms. Most will show different statuses of orders— open, filled, partially filled or canceled.

When investing over the phone, an investor can receive a verbal confirmation from the broker on the price of the trade and the number of stocks filled. The investor will then likely receive a confirmation in the mail from the broker a few days later. Typically, trades made over the phone are visible on the company's website or trading platform as well, so investors can confirm and tally immediately.

What happens after an order is executed?

Once an order is executed, the settlement period begins. At this stage, the buyer makes the payment and the seller, in turn, delivers the purchased shares. Settlement usually takes two business days after the trade to complete.

Let’s say an investor bought shares of Facebook on Monday. As soon as the order is filled, the broker will debit their account for the cost of the transaction. But the investor’s account likely won’t officially receive the shares until Wednesday.

The above examples are shown for illustrative purposes only. In general, understanding order types can help you manage risk and execution speed. However, you can never eliminate market and investment risks entirely. It's usually best to choose an order type based on your investment goals and objectives. 20200103-1048608-3152918

Related Articles

What are bull and bear markets?

Updated January 10, 2020

What is a Security?

Updated January 10, 2020

What is the Nasdaq?

Updated January 10, 2020

What is the Stock Market?

Updated January 10, 2020

What is a Broker?

Updated January 10, 2020

What is an Option?

Updated January 10, 2020

You May Also Like

What is the Gold Standard?

January 24, 2020

The gold standard refers to an economy where paper money and coins are equal to a set amount of gold and can be exchanged for that amount at any time.

This information is provided for educational purposes only and is not and should not be construed as an offer to sell or a solicitation of an offer to buy any security. In addition, this information is not intended to serve as a recommendation to buy or sell any security or other investment product. This information is not individualized, does not constitute a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals and/or an investment adviser for advice that is specific to your situation. Securities offered through Robinhood Financial LLC, member SIPC and FINRA. The information used to create this content is based upon information reasonably available to Robinhood Financial LLC as of the date of publication. © 2020 Robinhood Markets, Inc. Robinhood® is a trademark of Robinhood Markets, Inc.