If you want more control over the price you pay for stocks, you need to understand limit orders. Unlike market orders that execute immediately at any price, limit orders let you specify exactly how much you are willing to pay or accept. In this guide, we will explain how limit orders work and when to use them.
What is a Limit Order?
A limit order is an instruction to buy or sell a stock at a specific price or better. When you place a limit order, you set the maximum price you are willing to pay (for buys) or the minimum price you are willing to accept (for sells). Your order will only execute if the market reaches your specified price.
The simple version: A limit order says "I only want to buy at this price or lower" or "I only want to sell at this price or higher." If the market never reaches your price, your order will not execute.
How Limit Orders Work
When you submit a limit order, here is what happens:
- Your order is sent to the exchange with your specified limit price
- The order sits in the order book waiting for a match
- If the market price reaches your limit price (or better), your order executes
- If the market never reaches your price, your order remains unfilled
- Unfilled orders typically expire at the end of the day unless you specify otherwise
Buy Limit Orders
A buy limit order is placed below the current market price. You are saying you want to buy the stock, but only if it drops to your specified price.
Example: Buy Limit Order
Apple (AAPL) is currently trading at $180 per share. You think it is a good buy at $175.
- You place a buy limit order for 100 shares at $175
- If AAPL drops to $175 or lower, your order executes
- If AAPL stays above $175, your order remains unfilled
- You will never pay more than $175 per share
Result: If Apple drops to $175, you buy 100 shares for $17,500 or less. If it never drops that low, you do not buy anything.
Sell Limit Orders
A sell limit order is placed above the current market price. You are saying you want to sell the stock, but only if it rises to your specified price.
Example: Sell Limit Order
You own 100 shares of Apple, currently trading at $180. You want to take profits at $190.
- You place a sell limit order for 100 shares at $190
- If AAPL rises to $190 or higher, your order executes
- If AAPL stays below $190, your order remains unfilled
- You will never sell for less than $190 per share
Result: If Apple rises to $190, you sell 100 shares for $19,000 or more. If it never reaches that price, you keep your shares.
When to Use Limit Orders
Limit orders are ideal in these situations:
- Price sensitive trades: When the specific price matters more than immediate execution
- Less liquid stocks: When trading stocks with wide bid-ask spreads, limit orders prevent you from paying too much
- Volatile markets: During high volatility, limit orders protect you from wild price swings
- Setting profit targets: Place sell limit orders at your target price to automatically take profits
- Buying dips: Set buy limit orders below the current price to catch pullbacks
Advantages of Limit Orders
- Price control: You know exactly the maximum you will pay or minimum you will receive
- No slippage: You will never get a worse price than you specified
- Set and forget: Place your order and let the market come to you
- Better entries: Can help you get better prices by waiting for pullbacks
- Works while you sleep: Orders can execute even when you are not watching the market
Disadvantages and Risks
Limit orders have some drawbacks you should understand:
- No execution guarantee: If the market never reaches your price, your order will not fill
- Partial fills: Large orders might only partially fill if there are not enough shares available at your price
- Missed opportunities: The stock might move in your favor without ever hitting your limit price
- Time sensitive: In fast-moving markets, you might miss the trade entirely
Important: A limit order guarantees your price but not execution. A market order guarantees execution but not price. Choose based on what matters most for each trade.
Limit Order Time in Force Options
When placing a limit order, you can specify how long it should remain active:
- Day order: Expires at the end of the trading day if not filled
- Good til canceled (GTC): Remains active until filled or you cancel it (usually up to 60-90 days)
- Immediate or cancel (IOC): Fills immediately what it can and cancels the rest
- Fill or kill (FOK): Must fill the entire order immediately or cancel completely
Tips for Using Limit Orders
- Check the bid-ask spread: Place your limit price within the spread for faster fills
- Be realistic: Setting limits too far from the current price means they may never fill
- Review open orders: Check your pending limit orders regularly to make sure they still make sense
- Use with volatile stocks: Limit orders are especially valuable when prices swing wildly
- Consider partial fills: Be prepared for large orders to fill in pieces over time
Limit Orders for Options Trading
Limit orders are particularly important for options traders because:
- Options often have wider bid-ask spreads than stocks
- Market orders on options can result in very poor fills
- Always use limit orders when trading options spreads
- Start with the mid-price between bid and ask as your limit
Track Your Order Performance
Pro Trader Dashboard helps you analyze your trades and see how different order types affect your results. Track your fills, slippage, and overall trading performance.
Summary
Limit orders give you control over the price you pay or receive for a stock. They are essential tools for traders who want to manage their entry and exit prices precisely. While limit orders do not guarantee execution, they protect you from paying more than you intended. For most trading situations, limit orders should be your default choice over market orders.
Want to learn about protecting your positions? Check out our guide on stop orders or learn about stop-limit orders.