What Is a Limit Order in Trading, and How Does It Work?

Definition:

A limit order is a type of order to buy or sell a security at a specific price or better. Unlike a market order (which executes immediately at the best available price), a limit order will only be filled if the market reaches the price you’ve specified.

How It Works:

✅ Buy Limit Order:

• You set a maximum price you’re willing to pay.
• The order executes only at that price or lower.
• Used when you want to avoid overpaying.

Example:
You want to buy a stock currently trading at $50.
You place a buy limit order at $48.
→ The order only executes if the stock drops to $48 or lower.

✅ Sell Limit Order:

• You set a minimum price you’re willing to accept.
• The order executes only at that price or higher.
• Used to lock in profits or avoid selling too low.

Example:
You own a stock trading at $50.
You place a sell limit order at $52.
→ The order only executes if the stock rises to $52 or higher.

Advantages of Limit Orders:

• You control the price.
• Avoid slippage during volatile markets.
• Good for setting target entry/exit points.

Disadvantages:

• No guarantee the order will be filled.
• May miss trading opportunities if the price never hits your limit.
• Can be partially filled or remain pending.

When to Use a Limit Order:

• When you want precision over speed.
• In volatile markets where prices fluctuate quickly.
• When trading illiquid stocks or low-volume assets.