A:

A buy limit order is only executed when the asking price is at or below the limit price specified in the order. Novice traders frequently forget that it is not the bid price that must be at their buy limit level but the ask price. Suppose a trader expects a stock price to fall to $50 and wishes to buy the stock in the event that it does retrace downward to that level. If he places a buy limit order at $50 and the stock falls only to exactly the $50 level, his order is not filled, since $50 is the bid price, not the ask price. The current market price showing for a stock is always the bid price.

A trader must always be aware of what the current bid-ask spread is when considering placing a buy limit order. Even if the bid price falls below the specified buy limit price, the trader's order is not filled if the ask price remains above his specified buy limit price. A buy limit order is only guaranteed to be filled if the ask price drops below the specified buy limit price. If the ask price only trades exactly at the buy limit level, but not below it, then the trader's order may or may not be filled. There may be more buy orders at that price level than there are sell offers, and therefore all buy limit orders at that price will not be filled.

Traders also have to keep in mind that the bid-ask spread can often widen considerably during volatile trading. A stock may be trading with a $1 spread between the bid and ask, but if there is a sudden, sharp price move, the bid-ask spread may temporarily widen to as much as $4 or $5.

RELATED FAQS
  1. The difference between a market order and limit order

    Market orders execute a trade to buy or sell immediately at the best available price. A limit order only trades when the ... Read Answer >>
  2. What do the bid and ask prices represent on a stock quote?

    Learn what the bid and ask prices mean in a stock quote. Find out what represents supply and demand in the stock market and ... Read Answer >>
  3. What's the difference between a stop and a limit order?

    A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. With ... Read Answer >>
Related Articles
  1. Trading

    Understanding order execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  2. Trading

    High-Frequency Trading: A Primer

    An in depth look at how high-frequency trading works and who the players are.
  3. Investing

    Understanding Gold Quote Prices

    Willing to trade gold but puzzled by gold price quotes and terminology? Investopedia explains how to read gold price quotes.
  4. Investing

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
  5. Trading

    Day trading strategies for beginners

    This day trading tutorial covers general principles, deciding when to buy and sell, common day trading strategies and how to limit losses.
  6. Personal Finance

    A Day in the Life of a Day Trader

    Day trading has many advantages, and while we often hear about these perks, it's important to realize that day trading is hard work.
RELATED TERMS
  1. Buy Limit Order

    A buy limit order is an order to purchase a security at or below ...
  2. Fill

    A fill is the action of completing or satisfying an order for ...
  3. Below the Market

    Below the market can refer to any type of purchase or investment ...
  4. Stop Order

    A stop order is an order to buy or sell a security when its price ...
  5. Above The Market

    Above the market refers to an order to buy or sell at a price ...
  6. Order

    An order is an investor's instructions to a broker or brokerage ...
Trading Center