Stock Limit Orders and How They Work

There are several different stock orders you can place to buy or sell shares of stock. Each one has a different component that makes it unique, and the four types of orders are market orders, limit orders, trailing stop orders, and stop loss orders. This article will cover limit orders and explain how they work.

Definition Breakdown

Limit orders are stock orders that allow you to buy or sell shares of stock at a pre-set designated price OR better.

So let's say we want to buy Microsoft stock, which is currently trading at at a last of $30.27 per share, but we only want to pay $30.00 or less for our shares. When we place the limit order and fill out the trade ticket, we basically say, "hey, I know Microsoft is trading above $30 per share right now, but if the price comes down to $30 or lower, automatically buy me in please".

What then happens is your order goes into a electronic system that will automatically buy the shares you desire at $30 or less per share.

Other Notes (Expiration, Cost, Etc.)

Some other points to note about buying stock with limit orders:

  1. You can have the order set up to expire at the end of the day, end of the week, end of the month, or never, it doesn't matter.
  2. You do not need to be present when the order takes place.
  3. Limit orders also cost the same price to place as a market order (Note: Other order types may depend on your stock broker.)
  4. Some professional traders recommend ONLY using limit orders to make your trades because it guarantees you are getting what you ask for.

Comments

  1. Posted by Rich on May 14, 2007 at 6:43 am

    Nice article. Might be useful to cover the sell limit order in an example. Reason being when I first started trading I almost made the mistake of trying to use a sell limit order like a stoploss (my broker didn't offer stoploss orders).

    Cheers

    Rich

  2. Posted by James Mahood on July 17, 2007 at 7:04 pm

    Read your discussion of limit orders, but something happened today that you didn't take into account. I placed a limit order to buy at 65.23, but the stock (RWX) closed at 65.20--but my limit order did not execute. I called the broker and was told my limit order did not execute because the asking price did not fall below 65.23. Sounds like BS to me because the stock closed below 65.23, so the asking price had to have fallen below 65.23. Do you have any thoughts about this?

  3. Posted by Aaron on August 28, 2007 at 1:02 pm

    Limit orders can be very helpful when looking for the right price. I very rarely ever use market orders anymore, since I have been burned a few times that way. Limit orders allow you to set the price, and they can always be cancelled if need be.

  4. Posted by Cody Staub on October 2, 2007 at 3:32 pm

    That sounds like a good way of doing things. I've often heard of being able to set your price...I just never knew what it was called. Thanks for a great article.

  5. Posted by TFS on April 26, 2008 at 1:09 pm

    I generally do not use limit orders, except for very low volume stocks. If I want to buy a stock I just buy it at the market.

  6. Posted by Deanna on October 3, 2008 at 3:31 pm

    This happened to me too. I had an limit order to sell (USB) at $41.00 the price rose to $42.25 and my order didn't fill. The online broker told me the stock only rose to that price for a minute and a half, it was only institutional trading and there was no way my order would have ever been filled! What is up with that?

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