What is a Limit Order?
Limit Order Definition
Two Types of Limit Orders
There are two types of limit orders, buy limit orders and sell limit orders.
If an investor is interested in selling Google stock, then they will set a sell limit order that will not execute until the price of the stock is equal to or higher than the desired limit.
To the other side then, if another investor decided to invest in Google then they would set a buy limit order that wouldn’t execute unless the stock is being sold for the set price or less.
However, this does not mean that setting a limit order is the same as buying or selling stock.
Orders may not be filled if the price of the stock does not rise or fall, depending on the order type, to meet the pre-set price point.
As a result, if the price point limit isn’t selected carefully an investor might very well miss out on a good opportunity.
A popular use of the limit order, beyond what has already been discussed is to combine it with its counterpart the stop order.
In doing so, an investor makes two orders that create a high and a low within which stock can be bought or sold.
This further mitigates any potential for stock being bought or sold at an unfavorable price.
Example of Limit Order
Finally, to wrap up, let’s look at an example.
An investor wants to sell their Google stock, but the price per share of $200 is too low preventing him from earning the ROI he’s looking for since he purchased it at $190.
As a result, the investor executes a sell limit order that asks that all of his google stock be sold once the price raises to the desired amount.