Definition: A limit order is an order to buy or sell a security at a specified price or higher. However, it is not executed if the price set is not met as long as the order is open.
What Does Limit Order Mean?
What is the definition of limit order? Unlike the stop order that is executed only if the security price meets the stop price, the order sets a minimum and a maximum value for the security price, and it is automatically executed when the security reaches the minimum or the maximum value. Hence, the order provides an assurance that the trade will be executed at the minimum or the maximum price set.
On the downside, limit orders incur a higher commission and are canceled if not executed during the trading session. In this case, the investor can limit the length of the order to avoid cancellation of the order and increase the possibility of execution.
Let’s look at an example.
Example
Anastasia wants to buy the stock of company X for $40. The stock currently trades at $42, so she asks her broker to set a limit-order and buy at $40. Since the markets are volatile, the stock may rise to $55 or drop to $40, but Anastasia knows that as soon as the stock price reaches $40, the buy order will be automatically executed. If she decides to sell the stock at $52, she will set a limit-order to sell at $52, and as soon as the stock price reaches the set price, the sell order will be automatically executed.
limit-orders are largely used in volatile financial markets because they allow investors to have control over their trades. For example, if a stock fluctuates between $40 and $50 on a volatile trading, a market order, such as the stop order, will not guarantee that the order will be executed. On the contrary, because the limit-order offers a minimum and maximum value, it is more likely for the price to reach the min or the max and be executed accordingly.
Summary Definition
Define Limit Orders: Limit order means a mandate to sell or buy a security if the price is right and the firm can profit from the sale or purchase.
