What is a Limit Order?
A limit order is an order to buy or sell a stock at a set price or better — But there is no guarantee the order will be filled.
🤔 Understanding a limit order
Limit orders are a tool in your trading toolkit to give you more control over the price you pay for a stock. Limit orders "limit" the price you pay to buy a stock, or the price you receive for selling one — They allow you to choose the price you want to buy a stock at or sell it for. Unlike a market order that buys or sells a stock at the best available price, a limit order only happens if the price is at or better than a price you set. Limit orders allow investors to specify the price they want, whether buying or selling. A buy limit order prevents you from paying more than a set price for a stock — a sell limit order allows you to set the price you want for your stock. If the stock price hits the limit price (the price you set on a limit order) the stock is bought or sold.
An investor places a buy limit order for 100 shares of Apple at $200 (the limit price) on August 29, 2019, with the stock trading at $207.76. If the stock falls to $200 or below, the trade takes place. If Apple’s stock fails to fall to $200 or below during a set period, the order will expire unfilled, which could be a day or until the investor cancels the order.
Think of how you use eBay ...
Just like eBay allows bidders to place max bids for an auction — setting the most you’ll pay for an iPhone or vintage jean jacket — limit orders allow investors to place max bids for what they're willing to pay for a stock. If you’re a seller, a limit order lets you pick the minimum amount you're willing to sell a stock for (the “reserve price” to use the eBay example). Limit orders are one of the tools in an investor’s toolkit — but there’s always the risk that the stock never reaches your ideal stock price and the limit order doesn’t get filled.
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- How does a limit order work?
- How long do limit orders last?
- What's a limit order price?
- Why do investors use limit orders?
- What are the risks of limit orders?
- What's the difference between a limit order and a market order?
- What are the differences between limit orders and stop orders?
- What is a limit order vs. stop-limit order?
- Things to consider
How does a limit order work?
Limit orders allow investors to buy at the price they want (or better). If an investor wants to buy shares of Facebook — which traded at $184.46 on Aug. 29, 2019 — at $180, they will place a buy limit order with a limit price of $180. Your order will process if Facebook falls to the limit price of $180 or below. On the flipside — Let’s say you want to lock in a profit on Facebook's stock at $195. Placing a sell limit order with a $195 limit price means you sell the stock if it rises to reach the $195 mark or higher.
How long do limit orders last?
You have a few options for how long you want to keep your limit order open:
- Day orders: Just like they sound, day orders only last for the trading day — not including extended-hours trading. Unless you specify otherwise, the orders placed with most brokers are day orders.
- Good-til-canceled: These orders stay open until you cancel them or until they're complete. Most brokers put a time limit, such as 90 days, on these orders to prevent some long-forgotten order from processing years later.
- Fill-or-kill: Think all or nothing. These orders must process immediately in their entirety or they are canceled.
- Immediate-or-cancel: Like fill-or-kill orders, these orders must process immediately or be canceled. However, immediate-or-cancel orders can be partially filled.
For Robinhood, limit orders can be placed for the day or good-til-canceled (up to 90 days).
What's a limit order price?
The limit price is the price an investor sets. It's the price that a limit order will be executed at, assuming the stock reaches that level. Think of it as the price an investor wants to pay for a stock or sell it for.
- Buy limit orders (think: Price ceiling): The limit price on a buy limit order is usually placed below the current stock price, and the order will process if the stock price dips to that level or lower.
- Sell limit order (think: Price floor): The limit price on a sell limit order is generally placed above the current stock price and will process at that set price or higher.
A fun way to remember where the order price should be set for limit or stop orders are the acronyms BLiSS and SLoBS. BLiSS stands for buy limit or sell stop, which are both done at or below the current market price. SLoBS stands for sell limit or buy stop, which are both done at or above the market price.
Note that the limit price can be set above the current stock price on buy limit orders, or below the current stock price on sell limit orders, but these orders will usually process immediately as the best available price is already available.
Why do investors use limit orders?
Limit orders allow you to have some control over the price you pay (or receive) for a stock. Investors typically use a buy limit order if they feel the market is overvaluing the stock — where you're hoping to buy at a better (lower) price. It also gives you more certainty about your purchase price if a stock is volatile — rising and falling quickly. A buy limit order would prevent you from getting a market order filled at a price you weren't expecting. A sell limit order allows you to lock in what you’re willing to sell a stock for.
What are the risks of limit orders?
No guarantees here. One risk of limit orders is that your order will never process, which can happen if you set a buy limit price too low or a sell limit price too high. Or if a stock is volatile, you could leave money on the table with a limit order. A stock could keep falling even after a buy limit order processes, such as the case if the company reports poor earnings results. And a stock may soar well past your sell limit order if there's a buyout, meaning you miss out on potential profits.
Only getting a few of the shares you want is another risk with limit orders — known as a partial order fill. Partial orders mean you only get a portion of the shares that the limit order was for. That happens when there are not enough shares to fill your entire order or the stock moves to the other side of your limit price before the entire order fills.
What's the difference between a limit order and a market order?
Market orders are how most people buy and sell stocks. It's the default setting when placing an order with a broker. Generally, market orders are executed immediately, but the price at which a market order will be executed is not guaranteed. Meanwhile, limit orders do not guarantee execution, but help ensure that an investor does not pay more (or receive less) than a pre-set price for a stock.
Market orders process immediately at the best available stock price, while limit orders process at the limit price or better (better for you that is). Keep in mind the last-traded price is not necessarily the price at which a market order will be executed. In fast-moving markets, the price at which a market order will execute often deviates from the last-traded price or “real time” quote.
Market orders are allowed during standard market hours — 9:30 a.m. EST to 4:00 p.m. EST. Limit orders are the only permitted order type during pre-market and after-hours trading sessions — Robinhood’s extended hours trading sessions are 9:00 a.m. EST to 9:30 a.m. EST for pre-market and 4:00 p.m. EST to 6:00 p.m. EST for after-market. So if you've placed an extended hours order, you've used a limit order. Keep in mind extended hours trading carries some added risks (e.g. increased volatility) and is not suitable for every investor.
What are the differences between limit orders and stop orders?
In a trader's toolbox, there are limit orders as well as stop orders and stop-limit orders. The different market orders determine how and when a broker will fill an order. Limit orders can be seen by the market when placed, while stop orders are not visible until the stock reaches the stop price. A stop order lacks the risk of a partial fill because it becomes a market order when the stock hits the stop price.
Stop order prices are the opposite of limit order prices. Stop buy orders instruct a broker to buy shares once a stock reaches a price that's higher than the current market price — Remember, you will typically place a buy limit order at a price below the current price. A stop sell order, also known as a stop-loss order, instructs a broker to sell once the price hits a set level below the current stock price — you typically place sell limit orders above the current price.
Investors should carefully select the stop price they use for a stop order since short-term market fluctuations in a stock’s price can activate a stop order. Also, the stop price is not the guaranteed execution price for a stop order — It’s a trigger price that causes the stop order to become a market order.
What is a limit order vs. stop-limit order?
A stop-limit order combines a stop and a limit order. Once the stock reaches the stop price, the order becomes a limit order. That offers you even more precision when setting a price you'd like to buy a stock at.
For example, an investor wants to buy Snap stock but wants to wait until the stock rises higher. But they also don't want to overpay. Placing a buy stop-limit order with a stop price at $20 and a limit price of $22 means that if Snap hits $20, the order becomes a limit order for $22. But the order will only be filled if you can buy at $22 or lower, effectively creating an even tighter range for what you would pay for Snap stock beyond just a limit or stop order alone.
Things to consider
No matter what type of order you choose, you cannot completely eliminate market and investment risks. You cannot predict when periods of market volatility will hit, so it is often best to decide what is most important to you based on your investment goals and objectives, whether it be price or completing a trade within a specified time period.
In general, understanding order types can help you prioritize your needs, manage risk, speed execution, and provide price improvement. For all of your securities transactions, check the trade confirmation you receive from your broker to make sure the price, fees, and order information is accurate.
These examples shown above are for illustrative purposes only and are not intended to serve as a recommendation to buy, hold or sell any security and are not an offer or sale of a security.
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