Investing > What is a Limit Order in Stocks?

What is a Limit Order in Stocks?

Discover how limit orders can add valuable protection to your stock trading strategy.

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Updated March 25, 2021

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Do you have a time machine, by chance?

Nope, me neither. ⌛️

We all know how valuable such a machine would be though—especially when it comes to trading! 📈 A single minute can make such a huge difference.

Luckily, the brilliant minds of the financial world have developed limit orders to make sure no one ever loses money because of bad timing. Let’s face it—bad news never has good timing, especially when it impacts your portfolio.

Knowing when to invest can be tricky, especially now rounds of stimulus checks have flooded the markets. What you didn’t invest in yesterday could cost more today—so what about tomorrow? 

Instead of stressing over your computer screen, you can just tell your trading platform to sell or buy whenever the security you’re interested in hits a certain price point. That way you can relax, without missing a good opportunity. Luckily, cold-hearted machines—called computers—won’t click the “sell” button too late.

To ensure you make the most of your trades, it is important to understand what limit orders are, how to use them, and what advantages and disadvantages they offer. In this guide, we outline what these orders are, how they work, as well as how and why everyone should use them.

What you’ll learn
  • Understanding Limit Orders
  • How Do Limit Orders Work?
  • Limit Order Examples
  • Why Use Limit Orders?
  • Problems with Limit Orders
  • How to Place a Limit Order
  • Limit Order vs. Stop Order
  • What is a Stop-Limit Order?
  • Limit Order FAQs
  • Get Started with a Broker

Understanding Limit Orders 💡

Market orders and limit orders are the most common ways to trade stocks and other securities, and they each have specific advantages and disadvantages. Luckily, all the top stock brokers for beginners have limit orders, so traders don’t need to worry about missing a good trade.

Market orders allow traders to buy or sell stocks at or close to their last trading price. They are kind of like that free-spirited friend who knows they’re going to a concert but doesn’t know the exact price of admission. 

Since market orders are guaranteed to be executed, buyers and sellers who place these orders basically agree to trade a stock within its current ask-bid spread. Because stock prices fluctuate quickly, market orders often mean trades are executed at inferior prices. 

Limit orders, on the other hand, are kind of like the friend who will only rock out at a specific price, and that sometimes means they miss the show entirely.

How Do Limit Orders Work? 🔎

Limit orders are useful tools when learning how to purchase stocks. Limit orders allow buyers and sellers to set the price at which a trade will be executed. For buyers, the limit price is the maximum price they will purchase a security. For sellers, the limit price is the minimum at which they will sell a security. 

While limit orders give traders price control, if the limit price is not met, the trade will not be executed, which might give some traders a bad case of FOMO. However, traders who master fundamental stock analysis are less likely to miss out on a trade and have a better idea of when to let an order expire.

Limit orders can be set to expire at the market’s close or the end of extended hours—traders can also keep an order “Good ‘til Canceled.” 

Keep in mind that GTC orders are not like diamonds and don’t last forever. If a GTC order is not executed or canceled, it will eventually expire. How long it takes for a GTC order to expire depends on the broker—but even if it does, you can just make a new one later.

Limit Order Examples 📚

Although the Fed claims rates will remain low through 2023, many investors are doubtful. Nevertheless, when re-evaluating their strategies and portfolios, traders can use limit orders to enter and exit their positions more efficiently—no need to trust the Fed when you can protect yourself with a buying or selling limit order. 

Buying Limit Order: Let’s say an investor decides to finally try sinking their teeth into Apple (AAPL). They could place a market order and pay about $120/share, but the recent fall in tech stocks convinces them to place a limit order to buy 50 shares at $110.47. 

Since the limit price is significantly lower than AAPL’s current trading price, the investor decides to keep the order GTC, which will expire in 90 days. If AAPL doesn’t hit the $110.47 limit before the expiration, the trade will not be executed and the investor will have missed the chance to take their bite. 

However, if AAPL does hit the limit price before the order expires, the trade will be executed and the investor will be stoked they waited to buy in at a lower price.

buy limit order for AAPL
An example of a buy limit order for AAPL compared to AAPL’s recent trading price. Image by TradingView.

Selling Limit Order: Let’s imagine another investor owns 50 shares of Volkswagen (VWAGY). After noticing that Volkswagen stock jumped 10%, they decide it is a good time to hang up the keys and cash out. They place a limit order to sell their shares at $40. 

If the stock price reaches the limit before the order expires, the trade will be executed. If the stock price does not reach the limit, the order expires and the investor keeps their shares.

sell limit order for VWAGY
An example of a sell limit order for VWAGY compared to VWAGY’s recent trading price. Image by TradingView.

Why Use Limit Orders? 🕵️‍♂️

Limit orders give traders more control when buying and selling securities in a volatile market. If a stock price is rising and falling like a wolf on a trampoline, placing a limit order is less risky than placing a market order. 

Limit orders also give traders time to step away from the screen. When a trader is through analyzing the technicals, they can simply place a limit order and let the computer execute the trade. 

And let’s face it, even if your screen is in hand while you’re strolling through the park, you’ll never execute a trade more quickly than an algorithm-powered bot that can juggle more positions than The Flying Karamozov Brothers can juggle bowling pins. 🤹. 

Problems with Limit Orders ⚠️

Unfortunately, limit orders are not the panacea for all trades. Not only can buyers and sellers miss out on a trade if the stock fails to reach the limit price, but less desirable trades can be executed if a buyer or seller spends too much time away from the screen and a price rises or falls above or below their limit.  

Remember the seller of the Volkswagen shares? Imagine they hadn’t noticed the high buying volume after the news broke about the jump in stock price. After the trade was executed at $40/share, the stock price continued to rise to $42.75/share. Had the seller not let the limit order turn them into an inattentive trader, they could have made an additional $137.50 for their 50 shares. 

Problems with Limit Orders
An example of a stock price continuing to rise after a sell limit order was executed. Image by TradingView.

Now consider our fictional buyer of Apple. What if their limit order was executed at the start of a particularly volatile day that closed after the stock dropped like an anvil? Surely the buyer would see McIntosh apples circling their head when considering how much they could have saved had they canceled their order to buy at an even lower price. 

How to Place a Limit Order 👨‍💻

As retail investors continue to enter the market after the GameStop frenzy, there have been a record number of trading app downloads. No matter what platform or device a trader uses, placing an order requires the same general information. However, since interfaces look different across platforms and devices, placing an order can be tricky.

Required information for limit orders:

  • Name/symbol of security
  • Action (buying or selling)
  • Quantity (number of shares)
  • Order type (limit) 
  • Time in force (expiration)

Depending on the platform, locating the order type can be as easy as reading the screen or as difficult as finding an Easter egg in a video game. Because some people prefer some interfaces over others, it is worthwhile to find the most user-friendly stock trading apps for you.

In general, if the order type is not present or is set to market order, try clicking on a nearby drop-down menu. On the Robinhood mobile app, a trader needs to click “buy” and then “shares” before they are able to select the order type. 

Setting a sell order
Setting a sell order on a user-friendly UI. Image by BitMart.com.

Limit Order vs. Stop Order ⚖️

A stop order allows traders to buy or sell a security if it reaches a specified “stop” price. Yes, this sounds familiar, but rest assured this is not Groundhog Day. Stop orders are similar to limit orders and are sometimes referred to as stop-loss orders

However, when placing a stop order to buy a security, the stop price is higher than the security’s last trading price. When placing a stop order to sell a security, the stop price is lower than the security’s last trading price. When the stop price is reached, the trade is executed as a market order.

Buying after a stock price goes higher and selling after a stock price goes lower sounds counterintuitive. So why do traders place these orders?

Stop orders to buy a security are often placed because a trader believes the security will continue to rise after reaching the stop price. In this sense, the trader believes the stop price to be a stock’s breakout price. 

Buy stop orders can also protect traders’ short positions. Since Bill Gross claims to have made $10 million betting against GameStop, he surely knows how valuable stop orders can be—but this technique is also crucial for retail investors who want to bet against companies in decline.

When placing a stop order to sell a security, traders are attempting to protect their gains or cut their losses. If a stock falls to the stop price, the trade is executed and the trader avoids further losses if the stock continues to fall.

Limit order and stop order cheat sheet.

Stop orders do not protect traders from price gaps, events that cause a stock price to significantly change outside trading hours. In order to limit the risk of a price gap, a trader might place a stop-limit order.

What is a Stop-Limit Order? 🛑

A stop-limit order is a hybrid of a stop and a limit order. The stop price is the price at which the trade is triggered, but rather than being executed as a market order, which risks taking a greater loss, a limit price is included. The limit price is the lowest price a trader is willing to sell. 

Falling stock price
Falling stock price triggered stop-limit order and trade is executed after stock rebounds above limit price. Image by TradingView.

For example, if a stock falls below the stop price, the trade is triggered, but it is only executed at the limit price or better. However, if the price of the stock falls below the limit price and continues trending downward, the trade will not be executed, leaving the trader with devalued shares.

Limit Orders in Stock Trading: FAQs

  • How Long Do Limit Orders Last?

    Typically a limit order expires when the market closes for the day, but traders can choose to keep the order open through extended hours or until it is canceled. In this case, if the trade is not executed or canceled, the order will expire after 60 or 180 days, depending on the broker.

  • Do Limit Orders Cost More?

    Depending on the broker, limit orders can have higher commission fees than market orders. 

  • What Are Limit Up and Limit down Rules?

    Limit up and limit down rules protect the market from extreme volatility. Basically, the regulating authorities have ruled that exchange-listed securities cannot swing more than a certain percentage in a single trading day. If a security hits the up limit or down limit, trading is paused. 

  • Can You Buy and Sell the Same Stock Repeatedly?

    The short answer is yes, you can buy and sell the same stock as many times as you like. However, buying and selling the same stock on the same day more than four times in a five-day period is considered day trading, which requires special approval from your broker.

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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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