What is a Limit Order?

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Trade Orders are the instructions given to the broker as to when and at what price are the securities to be purchased. These orders can be of various types, depending upon the requirements and the restrictions of the trader and they can be conditional or unconditional.

One of the types of trading orders is Limit Order.

Limit Order is a conditional order which instructs the stockbroker to buy or sell the security at a specific price or a price better than the specified price. A buy limit order gets executed only when the security is at a specified price or a price lower than that, and a sell limit order is executed only when the security is at the specified limit price or a price higher than that.

Unlike the market order, the purchase or sale will go through only when the specified price is reached in the market.

For example, a trader wants to buy the shares of IBM only at ₹160 or lower. In that case, he will place a limit order with buy limit price as ₹160 and the order will be executed only when the price of IBM share is at ₹160 or lower than that (in case the stock market opens at a price lower than the specified limit).

As a downside, a limit order may not get filled immediately or at all, as the price specified may or may not be reached; however, it is an excellent mechanism to control risks. By using the limit order, a trader can ensure that the securities are not bought at a high price and not sold at a low price.

The risks remain optimised.

Limit orders are of prime importance in intraday trading or in any form of trading which involves high volatility and high risks. It also ensures that the trader will be able to capture his target buying or selling price if the security gets dealt at that price in the market.

Based on the conditions attached to it, the limit order can be of the following types:

  1. All or none order: It is a type of limit order which instructs that all shares will be bought or sold at the same time if the trade is to be executed. The trade will be executed only if the full quantity of shares are available to be executed.
  2. Fill or Kill order: This type of limit orders states that the order must be immediately executed or cancelled.
  3. Limit on open order: Securities will be bought or sold at whatever the opening price of the market is but within a predetermined limit price.
  4. Limit on close order: Securities are bought or sold at the closing price of the market, but with a limit price.
  5. One cancels the other order: It is limit order in which the only one of the two orders is executed, whichever meets the mentioned parameters first and the other is automatically cancelled.
ProsCons
Helps to control risk in a highly volatile marketNot guaranteed as the market may not reach the specified entry or exit price
Desired price or better is achievedIn less liquid markets, an order may not get executed
Makes the trader more disciplinedDoes not get executed immediately, less time-sensitive
Does not make the trader overpay for a security

Thus, in volatile market conditions, like intraday trading, it is always suggested to trade using limit orders. This puts a check on the price at which the trader enters or exits a trade, and thus the trader is able to determine his own entry and exit positions based on his research and technical analysis.

It helps the trader evade heavy risks and controls the losses that could have occurred in case the trader entered the market as any available current market price.

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