Definition
The term limit order refers to instructions sent to a broker to buy or sell securities at a specific price or better. Since a limit order is not a market order, there is no guarantee the transaction will occur.
Explanation
Limit orders are typically used by investors to control the price paid, or received, when buying or selling securities such as stocks. Since the price specified in the limit order is oftentimes different than the prevailing market price, there is no guarantee the transaction will occur if the price of the security does not pass through the limit price.
Limit orders are oftentimes used in the context of buying or selling shares of stock. Generally, investors can place two types of these orders:
Buy Limit Order: instructs the broker not to pay more than the specified price per share. For example, an investor may place a buy limit order for $28.00 per share when the prevailing market price is $30.00 per share. If the market price of the security drops to $28.00, then the order will be executed.
Sell Limit Order: instructs the broker not to sell shares for less than the specified price per share. For example, an investor may place a sell limit order for $32.00 per share when the prevailing market price is $30.00 per share. If the market price of the security increases to $32.00, then the order will be executed.
If the price of the security does not reach or pass through the limit order price, the purchase or sale of the security will not occur. For this reason, limit orders are oftentimes combined with instructions that specify their duration. For example, a limit order may also be a day order or Good-Til-Canceled (GTC).
Related Terms
The term All-or-None order refers to broker instructions to buy or sell a quantity of securities in their entirety, or none at all. If an All-or-None order cannot be executed immediately, it remains open until it is executed or is closed at the end of the trading day.
Moneyzine EditorNovember 6th, 2024
The term Fill-or-Kill refers to broker instructions to buy or sell a security immediately, and in its entirety, or cancel the order. From a practical standpoint, a Fill-or-Kill order specifies the instruction will remain active for several seconds before being filled or canceled.Moneyzine EditorNovember 6th, 2024
The term Good-Til-Canceled refers to broker instructions to buy or sell a security at a fixed price, and the order will remain active until the investor cancels it or it is filled. From a practical standpoint, a Good-Til-Canceled order specifies the instruction will remain active even if it is not filled on the same trading day.Moneyzine EditorJanuary 19th, 2024
The term Immediate-or-Cancel refers to broker instructions to buy or sell a security instantly, or cancel the order. From a practical standpoint, an Immediate-or-Cancel order specifies the instruction will remain active for several seconds before being filled or canceled.Moneyzine EditorNovember 6th, 2024- The term stop order refers to instructions sent to a broker to buy or sell securities once the security reaches a specified price. When the price point on a stop order is reached, it is converted to a market order.Moneyzine EditorSeptember 21st, 2023
- The term National Best Offer refers to the lowest available ask price, which is a consolidated value from all of the national stock exchanges. The National Best Offer is the lowest price sellers are willing to accept for a security such as a stock.Moneyzine EditorSeptember 20th, 2023
- The term National Best Bid refers to the highest available bid price, which is a consolidated value from all of the national stock exchanges. The National Best Bid is the maximum price buyers are willing to pay for a security such as a stock.Moneyzine EditorSeptember 20th, 2023
The term market order refers to instructions sent to a broker to buy or sell a security immediately at the best available price. Since there are no restrictions on the selling or purchase price of the security, a market order is oftentimes immediately executed.Moneyzine EditorNovember 6th, 2024
The term day order refers to broker instructions to buy or sell a security that automatically expires at the end of the trading day if not executed. Unless specified by the investor, the default orders to buy and sell stocks at most brokerage houses are day orders.Moneyzine EditorNovember 6th, 2024
