What is a Limit Order in Stocks? What You Need to Know Before Investing

A limit order is an instruction to execute your trade at a fixed price, regardless of what the current market price is.

In the ideal world, we would be able to predict exactly when to buy or sell our stocks. If I had a time machine, I would go back to March 2020 and load up on all my high-conviction stocks. While time-traveling is not possible, luckily we have limit orders to make sure we never leave money on the table.

Knowing when to invest is tricky, especially when we do not know if our stocks will print money for us or drain our bank accounts. Instead of constantly stressing over the unknown, simply log into your brokerage and set specific price points you want to buy or sell your positions at. That way, you can take a breather without worrying about missing the next rocket to the moon.

To make the most of your investment experience, you need to understand what limit orders are, how they work, and their advantages and disadvantages.

Key Takeaways

  • Limit orders allow you to execute your trades at set price points regardless of current market prices. On the other hand, market orders execute immediately at whatever price is available.
  • While limit orders ensure you get the best prices for your trades, the downsides are that they make take weeks or months to get executed or fail to execute if the difference from the market price is too big.
  • We will go over some real-life examples of limit vs market orders and how we use them in our day-to-day investing and trading strategies.

How Limit Orders Work

If you want to use a limit order to purchase a stock, you will set the price to be at or below the maximum price you want to purchase the stock at. For example, if you want to purchase shares of Apple at $150, you would set a limit order to purchase the shares at your limit price of $150 or less.

If you want to sell a stock, you would set the price to be at or above the sale price that you want. If you believe that Apple shares will peak at $200, you can set a limit order to sell your shares at your limit price of $200 or more.

Generally, it is more profitable to use a limit order compared to a market order. In comparison, market orders execute immediately at whatever price is currently available in the markets, however, you do not always get the best price. On the other hand, your limit order may take some time to get filled or may not get filled at all if there is a huge difference in the price you set and the current market price.

Advantages and Disadvantages of Using Limit Orders

Pros of Placing a Limit Order

When you set limit orders, you can buy stocks during a dip or sell them during a peak. For example, if you have done some fundamental and technical analysis to determine when to buy and sell your positions, you can simply set the price targets and wait for them to hit. You do not need to check the market prices every hour or day to see if your price point gets reached.

You also ensure that you get the best deals possible when you make a trade by setting limit orders. With market orders, there is no guarantee that you will get the best price, particularly if there is a large difference between the bid and spread. For example, if the volume is low for a stock, you made need to adjust your price drastically to find someone to make your trade with.

Cons of Placing a Limit Order

Your limit order may never execute and you run the risk of missing out on any gains you could have made had you bought or sold the stock at its market price. If you set your price targets too far from the current price, you may have to wait weeks or months for the stock to hit your price points. That can cause you to feel stressed or be distracted until your order executes.

If you are strapped for cash, setting limit orders may negatively impact your portfolio as your money is in “limbo” until the order executes. If you sent limit orders that are good ’til canceled, your money can be put on hold for several months. Depending on what types of stocks you are purchasing, you may miss out on a dividend that you would have received had you placed a market order.

Real-Life Example

You want to buy a Microsoft stock, but you believe the current price of $252.60 per share is too high. You saw that the price of Microsoft stock was $235 in March 2021 and you believe the stock will fall to that price again. You log in to your brokerage account and place a limit order to buy Microsoft stock for a limit price of $235.

That means your order will only execute if the price of a share is $235 or less. Since it may take some time before Microsoft stock falls to that price,  you place a Good Til Cancelled Order (GTC), which will allow the order to remain open until the stock order is filled or you cancel the order.

Alternatively, you already own Microsoft stock and want to sell some shares, but you believe the current price of $252 per share is too low. You saw that the price of a share of Microsoft stock was over $260 in April 2021, and you believe the stock will rise to that price again. You log in to your brokerage account and place a limit order to sell Microsoft stock for a limit price of $260.

That means your order will only execute if the price of a share is above $260. Since it may take some time before Microsoft stock falls to that price,  you place a Good Til Cancelled Order (GTC), which will allow the order to remain open until the stock order is filled or you cancel the order.

Frequently Asked Questions

What is the difference between a market order and a limit order?

A market order is an order to buy or sell a security immediately. This type of order guarantees that the order will be executed, but does not guarantee the execution price. A limit order is an order to buy or sell a stock at a specific price or better.

Is a market order or limit order better?

Neither, as either order can be more appropriate for a given trading situation. If you have the funds, don’t be afraid to use both.

When to do a market versus limit order?

Either order can be more appropriate for a given trading situation, but consider using a market order when you want the stock trade to execute ASAP or you’re only trading a few shares. Consider a limit order when you’re looking for a specific price or you’re trading a large number of shares (hint: you can place multiple limit orders at various prices).

What are some assets I should consider placing a limit order for?

Cryptocurrencies are extremely volatile assets and you will have a greater success of hitting the limit order that you place. At the beginning of 2021, Bitcoin was in the $30,000 – $40,000 range. In March and April 2021, Bitcoin was around the $60,000 mark. And in May 2021, Bitcoin has fallen to around the $30,000 – $40,000 range. As such, a buyer of Bitcoin should strongly consider placing a limit order over a market order for Bitcoin. Conversely, Microsoft is a stable blue-chip company with much less volatility than Bitcoin. A buyer considering Microsoft stock may want to consider a market order.

Personal Experiences

I regularly use both market and limit orders to buy securities as both are beneficial to my goals.

Limit Order

I recently placed a sell limit order on five shares of Home Depot stock as I saw it trending upwards during the last few weeks of April 2021 and early May 2021. Although the price was was around $336 on May 6th, I was confident it would reach $340. As such, I placed a limit order for $339.75 and saw the trade was executed later that day. It wasn’t too long before the price dropped, and as of 05/19/2021, the price of a Home Depot stock is $314.

Market Order

In early March 2021, I noticed that TJX stock dropped to below $63 (it had been over $70 in late February 2021) and subsequently bought some shares via a market order. Sure enough, the price picked back up and reached $68 in a matter of days and even reached over $74 in early May 2021. As of 05/19/2021, the price has dropped to $67.45, but it feels good knowing I acted when I saw the price at $63.

The Bottom Line

Limit orders are useful as they allow you to place an order to buy or sell a stock when you are not satisfied with the current market price. Be aware that your order may never execute. However, the stock market frequently fluctuates and it is common for a stock price to go up and down throughout the year.

If you don’t want to deal with these unknowns, place a market order, which is usually executed immediately. And remember, you can always use both market and limit orders. Use context clues to apply the right order for your goals.

We are not financial advisors. The content on this website and our YouTube videos are for educational purposes only and merely cite our own personal opinions. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing. Always remember to make smart decisions and do your own research!

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