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What is a 'Limit Order'

A limit order is an order placed with a brokerage to execute a buy or sell transaction at a set number of shares and at a specified limit price or better. It is a take-profit order placed with a bank or brokerage to buy or sell a set amount of a financial instrument at a specified price or better; because a limit order is not a market order, it may not be executed if the price set by the investor cannot be met during the period of time in which the order is left open. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

BREAKING DOWN 'Limit Order'

While the execution of a limit order is not guaranteed, it does ensure that the investor does not miss the opportunity to buy or sell at the target price point if it is dealt in the market. Depending on the direction of the position, a limit order is sometimes referred to as a buy limit order or a sell limit order. For example, a buy limit order that stipulates the buyer is not willing to pay more than $30 per share, while a sell limit order may require the share price to be at least $30 for the sale to take place.

Stop Loss Orders

A stop loss order is the opposite of a take profit order: It is left to ensure that a transaction does not take place at a price worse than the indicated target. It can be used to sell an existing instrument or to enter into a new transaction.

Conditional Orders

Limit orders can have specific conditions added to them. An investor may indicate that the order must be executed immediately or canceled, which is called a fill or kill (FOK) order. They may also require that all desired shares be bought or sold at the same time if the trade is to be executed, which is called an all or none order. A limit order can be paired with a stop loss order for the same amount, with the stipulation that if one of the paired order is done, the other will be called automatically. This is commonly called "one cancels the other" or OCO.

A contingent order can also be called an "if/then" order. If the first part of the order is executed, the second part becomes a live order. If the first part is not executed, the second part is never executed, even if the market trades at the indicated level.

Timing

An order usually includes an indication of how long it will remain in effect. The term "good till canceled," abbreviated GTC, means that the order will remain in effect until the investor cancels it. It is common to have an order cancel automatically at the end of the trading day; however, in the foreign exchange market, which trades around the clock, orders can be filled 24 hours a day.

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