Understanding Order Types: Limit Orders

Limit orders give you control over the price you pay or receive. They're essential tools for managing costs and executing specific trading strategies. [DEFINITION] Limit Order: An order to buy or sell a security at a specified price or better. ### How Limit Orders Work **Buy Limit Order:** - Sets the MAXIMUM price you're willing to pay - Only executes at your limit price or LOWER - Won't fill if the stock doesn't reach your price **Sell Limit Order:** - Sets the MINIMUM price you're willing to accept - Only executes at your limit price or HIGHER - Won't fill if the stock doesn't reach your price [EXAMPLE] Apple trades at $185. You place a buy limit order at $180. | Market Price | Order Status | |--------------|--------------| | $185 | Not filled (price too high) | | $182 | Not filled (price too high) | | $180 | FILLS at $180 or better | | $178 | Fills at $178 (better than limit) | ### When to Use Limit Orders **Limit orders are ideal when:** - Trading less liquid stocks - You have a specific target price - Volatility is high - Trading in extended hours - Order size is large - You're not in a hurry [TIP] Many professional traders use almost exclusively limit orders. They'd rather miss a trade than pay more than intended. ### Limit Order Time Settings **Day Order (Default):** - Expires at market close if not filled - Fresh start each morning **Good Till Cancelled (GTC):** - Remains active for days/weeks/months - Useful for waiting at specific price levels - Most brokers cancel after 60-180 days **Immediate or Cancel (IOC):** - Fills immediately or cancels - Partial fills possible - Good for fast markets **Fill or Kill (FOK):** - Must fill entire order immediately - No partial fills allowed - Cancels if not fully filled [EXAMPLE] You want to buy 100 shares of Tesla at $200, but it's currently at $210. Strategy: Place a GTC buy limit order at $200. It sits waiting. Three weeks later, Tesla dips to $198 after a market pullback—your order fills at $200 or better. You bought exactly where you wanted without watching daily. ### The Trade-Off: Certainty vs. Price [KEY] Limit orders offer price control but sacrifice execution certainty. Your order might never fill if the stock doesn't reach your price. **The opportunity cost example:** - Apple at $185, you place limit at $180 - Apple rises to $200, $220, $250... - Your limit never triggered - Waiting for $5 savings cost you $65/share in gains ### Partial Fills When your limit order can only partially fill: [EXAMPLE] You place a limit order to buy 1,000 shares at $25.00. Only 400 shares are available at $25.00. Your order partially fills: - 400 shares execute at $25.00 - 600 shares remain open, waiting - Order stays active until filled, modified, or cancelled [WARNING] Some brokers charge per-trade, meaning partial fills over multiple days could result in multiple commissions. Check your broker's policy. ### Strategic Use of Limit Orders **Buy the dip strategy:** - Apple at $185 - You believe $170 is good value - Place GTC limit at $170 - If correction comes, you buy automatically **Take profits strategy:** - You own Tesla at $200 - Want to sell if it hits $250 - Place GTC limit sell at $250 - Locks in 25% profit if reached [EXERCISE] A stock trades at $50.00 with Bid: $49.95 | Ask: $50.05. You place a limit buy at $50.00. Will your order fill immediately? |ANSWER| No. You'll buy at your limit ($50.00) or lower, but sellers are asking $50.05. Your order joins the bid queue at $50.00, waiting for a seller willing to accept $50.00 or for the price to drop. [SCENARIO] You're buying a small-cap stock that trades 100,000 shares daily. You want 5,000 shares (5% of daily volume). Using a market order, slippage could cost you 2-3%. Using a limit order slightly below the ask, you may get a better average price—even if it takes longer to fill.