What is a Limit Order?
A limit order is the use of a pre-specified price to buy or sell a security. For example, if a trader is looking to buy XYZ’s stock but has a limit of $14.50, they will only buy the stock at a price of $14.50 or lower. If the trader is looking to sell shares of XYZ’s stock with a $14.50 limit, the trader will not sell any shares until the price is $14.50 or higher.
How Do Limit Orders Work?
Using Limit Orders
There are various times to use a limit order such as when a stock is rising or falling very quickly, and a trader is fearful of getting a bad fill from a market order. Additionally, a limit order can be useful if a trader is not watching a stock and has a specific price in mind at which they would be happy to buy or sell that security. Limit orders can also be left open with an expiration date.
Real World Example
A portfolio manager wants to buy Tesla Inc's (TSLA) stock but believes its current valuation at $325 per share is too high and would like to buy the stock should it fall to a specific price. The PM instructs his traders to buy 10,000 shares of Tesla should the price fall below $250, good 'til canceled. The trader then places an order to buy 10,000 shares with a $250 limit. Should the stock fall below that price the trader can begin buying the stock. The order will remain open until the stock reaches the PM’s limit or the PM cancels the order.
Additionally, the PM would like to sell Amazon.com Inc.'s (AMZN) stock but feels its current price of $1,350 is too low. The PM instructs his trader to sell 5,000 shares should the price rise above $2,500, good 'til canceled. The trader will then put the order out to sell 5,000 shares with a $2,500 limit.