What is: A Limit Order?
- What Is: Passive Investing
- What Is: Dollar Cost Averaging?
- What Is: Bottom-Up Investing
- What Is: Top-Down Investing
- What Is: Value Investing
- What Is: Growth Investing
- What Is: Income Investing
- What Is: GARP Investing
- What Is: The Rule of 72
- What Is: A Falling Knife
- What Is: Cyclical Stocks
- What Is: The Dividend Yield
- What Is: The Price-to-Earnings Ratio (P/E)
- What Is: The Cash Flow Statement
- What Is: A Share Split
- What Is: A Share Buyback
- What Is: Discounted Cash Flow
- What is: An Exchange-Traded Fund (ETF)?
- What is: A Hedge Fund?
- What is: The Balance Sheet?
- What Is: The Profit and Loss Statement?
- What is: A Limit Order?
- What is: A Two-Bagger
A limit order is a specialty brokerage order type that allows you to specify a price at which to buy or sell.
A limit order directs the broker to either buy stock at a given price or lower or to sell stock at a given price or higher. The “given” price is specified by you.
For instance, if you want to sell 100 shares of XYZ, but think it might go up a bit more than the current price of $20, you could enter a sell limit order at $22. That way, the broker would not sell the shares until the price reaches $22 or more. Depending on the volatility of a stock, you might get exactly $22 or you might get a bit more, say $22.10, as being the first trade at or above your given price.
On the buy side, you wish to buy 100 shares of XYZ, but don’t want to pay more than $15 for them. You would use a limit-buy order to tell the broker not to purchase them for anything more than $15. This way, that will be the most you will pay.
Of course, the risk for both of these transactions is that the stock doesn’t trade at or above (sell), or at or below (buy) your limit price. In which case, you end up keeping or never buying the shares. In other words, don’t try to get too cute with this. If the shares are trading at $22.01, don’t set your limit at $22.13, hoping to squeeze out another 12 cents of profit. It’s almost always not worth it.
Depending on the broker, limit orders can be set to expire over different time frames. In other words, they will remain active until you either cancel them or the time runs out. Typical ranges are one day, one month, or GTC, which stands for “good ’til canceled: and really means three or four months.
Another aspect of the limit order is the ability to specify all or none at most brokers. If you are selling a block of shares an all or none requires that the whole block be traded. Otherwise, only a few shares may trade at your specified price over several days. Although most brokers charge a single commissions for all trades on one day, additional commissions are charged for trades on subsequent days. To avoid this, some limit orders are day orders that expire at the end of the day; others are good til cancelled, but usually specified after 90 or 180 days.
You can contact your broker for specific details on how it handles limit orders.