When investing in the stock market, it is important to understand different factors that can affect your profit and loss. More specifically, how certain order types can impact your positioning in the stock market. By taking a closer look at orders, you will see that there are different types of orders an investor can use based on their goal and the outcome they are looking to achieve.
In this article, we’ll focus on limit orders, covering what they are, the types available, and how they can help you control your trading decisions.
A limit order allows you to set a specific price at which you want to buy or sell a stock. This gives you control over the trade price, but it may not execute if the market doesn’t reach your chosen price.
Limit orders are useful when you want more control over the price you pay or receive, especially in a volatile market. However, they come with the risk that your trade may not execute if the market doesn’t match your specified price.
Key Takeaways
The two types of limit orders are buy limit orders and sell limit orders.
An asking price is the price an investor is willing to accept for a stock. Also called the offer price, the ask quote might also include how many shares the investor wishes to sell.
Limit orders may not be filled.
A limit order allows you to set a maximum/minimum price that you are willing to buy/sell a stock for solely focusing on controlling the price.
A day limit order remains active only for the duration of the trading period and does not carry over into after-hours trading sessions. However, a good till canceled (also known as GTC) limit order carries over into the next trading session until it expires, executes, or you decide to cancel the order.
Types of limit order
1. Buy limit order
A buy limit order allows an investor to purchase stock at a specified price or below that price. This type of order gives the investor control over how much they want to pay for the stock and ensures that the order will only be executed at the set price or lower.
Example of a buy limit order
For example, if you want to purchase FHS stock for $20, you place a buy limit order at $20. This tells the system you are willing to buy the stock at $20 or less. However, if the current market price of FHS stock is $36, your buy limit order will only execute if the stock price decreases to $20 or below. If the price stays at $36 or increases, your order will not be filled.
Potential advantages of a buy limit order
Price control: A buy limit order gives you control over the price at which you purchase a stock. You can ensure you pay no more than your set price or potentially even less if the stock price falls below the limit.
Benefit from price decrease: If you anticipate a stock’s price will decrease, a buy limit order can allow you to purchase it at a lower price.
Potential disadvantages of a buy limit order
Missed opportunities: The downside of using a buy limit order is that you may miss out on a trade. If the stock price doesnt decrease to your set price, or if it increases instead, your order will not be executed.
How buy limit orders influence buying decisions?
Using a buy limit order influences your buying decision by allowing you to target a specific price. However, while you have control over the price, you may miss opportunities if the stock price doesnt fall to your desired level. The key is balancing the risk of not executing the trade versus waiting for the price to reach your target.
2. Sell limit order
A sell limit order is an instruction to sell a stock at a specified price or higher. This type of order gives an investor control over the minimum price they are willing to accept for the stock. The order will only be executed if the stock price reaches or exceeds the set price, ensuring the seller doesn’t sell at a price lower than their target.
Example of a sell limit order
For instance, let’s say you own shares of FHS stock, and the current market price is $20. You believe the stock has the potential to rise in the future, but you only want to sell if it hits $36 or higher. To achieve this, you would place a sell limit order at $36. This means your stock will only be sold if the price reaches $36 or goes above it. If the price of FHS stock stays below $36, your order will remain unfilled.
Potential advantages of a sell limit order
Price control: A sell limit order gives you control over the price you sell your stock. You can ensure you sell the stock at your desired price or higher, potentially maximizing your profits if the stock price rises above your set limit.
Avoid selling at a loss: By setting a limit price, you avoid selling at a lower cost than you’re willing to accept. This is particularly useful if you are unwilling to take a price drop and want to hold out for a better offer.
Lock in profits: If you believe the stock price has risen to a reasonable level, a sell limit order helps you lock in profits without the need to monitor the market constantly.
Potential disadvantages of a sell limit order
Missed opportunities: The primary disadvantage of a sell limit order is that if the stock price never reaches your set limit, your order will not be filled. This can lead to missed opportunities, especially if the stock price continues to rise but never hits your exact target.
Market volatility: In volatile markets, the stock price may hit your limit briefly and then quickly reverse, leading to missed sales opportunities if the stock price doesnt stay at or above your limit long enough to execute the order.
How sell limit orders influence selling decisions?
Using a sell limit order can influence your selling decision by allowing you to target a specific price. It gives you control over your desired selling price, helping you avoid selling too early or at a price you may deem unsatisfactory. However, there is always the risk that the price may not reach your target, and thus your order may remain unfilled, especially if the market doesn’t move as anticipated. Balancing between waiting for the target price and possibly missing out on selling when prices are rising may be a critical factor in this decision-making process.
The below image shows the difference between where to place a buy limit order and where to place a sell limit order.
How limit orders work with the bid-ask spread?
When trading stocks, there is a key difference between the bid and the ask, which is an important nuance for investors to understand. When a buyer makes a bid, they specify with that number how much they’re willing to pay for the stock in question.
The bid-ask spread is the gap between the highest bid price and the lowest ask price for a particular stock. The bid price is always lower than the ask price, but sometimes the spread is relatively small. For example, if the highest bid is $10/share, and the lowest ask is $10.50/share, the bid-ask spread for that security would be $.50.
Investors using limit orders to buy securities should keep in mind the difference because buy limit orders take into account the asking price. The stock’s asking price must be at the limit order price or lower for the order to be filled.
For example, if an investor is looking to buy at $11/share, the asking price must drop to $11, and there must be an offer from a seller available at that price for the order to be filled.
Limit order vs. Market order
Limit orders and market orders differ mainly in price control and execution speed. A limit order only executes if the market hits your set price, giving you control but no guarantee of a filled order. A market order, on the other hand, executes immediately at the current market price, ensuring fulfillment but with no price control.
However, market orders focus on purchasing stock at whatever the market price and the fulfillment of the order. While a limit order focuses on price, market orders focus on quickly fulfilling the order.
For example, let’s say you want to place a market order to buy stock at Blue Company at the current market price. This means that your order will fill at whatever the current stock price is for Blue Company. This allows for your order to get filled rather quickly, which is the opposite of a limit order that would wait for the stock price to meet your limit price. In the photo example below, you will see where a market order shows up on the chart in the presence of a buy limit order and a sell limit order.
An important thing to consider is that limit orders usually come as they are available. This means that despite a stock meeting the limit price, a limit order has the potential of not executing due to other orders being ahead. In addition, limit orders are more complex for a brokerage to perform than market orders, which can result in higher fees than other orders. However, unlike market orders, limit orders can give you more control over unpredictable and fluctuating stock prices.
When learning how to invest in stocks, it’s important to understand the advantages and disadvantages of using market orders or a stock limit order. Moreover, how either can contribute to your end goal and support your decisions as an investor. Always remember that there are risks involved when participating in the stock market.
How to use a limit order in stock trading?
A limit order allows you to set a specific price at which you are willing to buy or sell a stock.
1. Determine the type of order
Decide if you are looking to buy or sell stock.
2. Set a buy limit order
For example, if you want to buy XYZ stock and only want to pay $20.
If the current market price is $36, you may enter a limit order for $20.
This indicates you are willing to purchase the stock only if the price falls to $20 or below.
If the stock price for XYZ falls to $20 or below, your order can then be triggered.
3. Set a sell limit order
Now, if you are ready to place a sell limit order for XYZ stock.
You may only be willing to sell for $36.
If the current market price is $20, you may set a limit of $36.
This indicates you want to sell the stock only if the price increases to $36 or above.
If the stock price for XYZ rises to $36 or above, your order can get triggered.
4. Use a stop-limit order for protection
A stop-limit order may reduce risks by combining a stop order with a limit order.
When an investor uses a stop-limit order, the order may execute at the set limit price once the stock price meets the stop price.
When to use limit orders?
Limit orders give you more control over the price you buy or sell at, but it’s important to know when to use them to get the most benefit. Unlike market orders, which are filled right away at the best available price, limit orders are only executed when the stock hits your specified price or better. This means you can avoid overpaying or selling too low, but there’s also a risk that your order may never get filled. Here’s when to use them:
Here are some key scenarios when you might want to use a limit order:
Control the price: Buy or sell limit orders may ensure trades occur at a specific price or better, avoiding overpaying or underselling. Example: A buy limit order may allow you to purchase only at or below your target price.
Trading outside regular hours: Limit orders can maintain price control during low-liquidity pre-market or after-hours trading. Example: If a company reports earnings after hours, you may place a buy limit order to fill only at your preferred price.
Market volatility: Limit orders may help avoid unfavorable prices in fast-moving markets by setting a specific trade price. Example: During a volatile earnings report, a buy limit order can prevent overpaying if prices temporarily jump.
Thinly traded stocks: Limit orders can prevent overpaying or underselling in stocks with low liquidity and wide bid-ask spreads. Example: For a low-volume stock with a wide bid-ask spread, a limit order may ensure you pay or receive your target price.
Set-and-forget trades: Limit orders may automate trades at target prices without constant market monitoring.Example: You can place a buy limit order at a fair price and let it fill automatically when the market reaches that level.
Long-term strategy: Limit orders can enable investors to target specific entry points for better price control over time. Example: For a stock with growth potential, a limit order may allow you to buy only at a lower target price.
Key considerations
Order duration:You can choose whether your order expires at the end of the day or stays open until it’s filled (GTC).
Risk of non-execution: If the stock doesn’t hit your price, your order may not get filled.
Liquidity: Limit orders work best in liquid markets. In less active stocks, there may not be enough volume to fill your order at your target price.
Time frames for limit orders
When it comes to using limit orders, you can also determine the time frame for which you want your order to remain active. Let’s say you are looking to keep your order active for the remainder of the day. This is called a day-limit order. A day-limit order remains active only during the trading period and does not carry over into after-hours trading sessions.
However, if you are looking for your limit order to remain active for a longer time, you would opt for a good till canceled. A good till canceled (also known as GTC) limit order carries over into the next trading sessions until it expires, executes, or you decide to cancel the order. Understanding stock market hours will also help guide you when trading.
Bottom Line
Public provides tools to help you take control of your trades with limit orders, allowing you to set the exact price at which you may want to buy or sell. Limit orders can enable more precise moves, whether for managing volatility, trading after hours, or supporting a long-term investment approach.
It takes just two minutes to open an account with Public.com and start using limit orders in your trading. Start your journey today and put the tools, data, and insights at Public to work for your financial goals.
