What is a Limit Order?
A limit order is another type of order that can be utilized by investors when buying or selling securities. The main point of choosing such an order is that it allows investors to specify the price at which they would like to conduct the transaction.
How Does a Limit Order Work?
Unlike a market order where an investor doesn’t specify the price, thus getting the best one available on the markets, a limit order enables to pre-select one. In practice, this means that if the selected price, or a better one, is not available at that moment, the transaction will not be executed. In this way the investor gets to buy or sell a security only at the value he deems appropriate: he won’t pay more or earn less than the amount he considers fair.
Advantages and Disadvantages of a Limit Ordert Order Work?
Placing a limit order is commonly perceived as a safer way to conduct a transaction, compared to a market order. By specifying the price, the investor gets guarantee that he won’t pay more (in case he’s buying) or receive less (in case he’s selling) than he indicated. This could prove especially useful in the event that the price of a security was moving sharply or the liquidity was low. However, it could potentially take more time as well as it doesn’t assure the investor that the transaction can indeed be executed at that price.
| Execution Price | Price Protection | Guarantee of Trade | |
| Limit Order | Trade executed at the predetermined price or a better one, if available | Yes | No |