What Is a Buy Limit Order?
An order that allows traders to decide how much they pay by purchasing assets for less than or at a stated price, is known as a buy limit order. Use of a buy limit order assures investors that they will only be paying the buy limit order set price, or lower.
A buy limit order does not, however, guarantee that an order will be filled. If the stated price is not reached by the asset, the order will not be filled, meaning missed for the investor.
- A buy limit order allows investors to pick a specific price and assures that they will only pay that price or better.
- A buy limit order will only execute when the price of the stock is at or below the specified price
- A buy limit order will not execute if the ask price remains above the specified buy limit price.
- A buy limit order protects investors during a period of unexpected volatility in the market.
- A market order prioritizes speed of sale, above the price of the security.
When Is a Buy Limit Order Executed?
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 they place a buy limit order at $50 and the stock falls only to exactly the $50 level, their 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 their 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.
Buy limit orders are more complicated than market orders to execute and may lead to higher brokerage fees.
Buy Limit Order vs. Market Order
A buy limit order allows you to set your desired criteria of what price you want to pay. Because buy limit orders do not initiate unless the specified price is met, they are a useful tool that can help investors avoid unexpected volatility in the market.
In a scenario where a general market order would execute during a "flash crash," a buy limit order will not execute. This occurs because a buy market order puts the speed of execution before the price of the security. The buy limit order, on the other hand, is primarily concerned with the set price applied by the investor.