Stop-Limit Order: What It Is and Why Investors Use It

what is limit order

The price of the asset has to trade at the buy limit price or lower, but if it doesn’t the trader doesn’t get into their trade. Controlling costs and the amount paid for an asset is important, but so is seizing an opportunity. When an asset is quickly rising, it may not pull back to the buy limit price specified before roaring higher.

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Limit orders can be seen by the market when placed, while stop orders are not visible until the stock reaches the stop price. A stop order lacks the risk of a partial fill because it becomes a market order when the stock hits the stop price. A fun way to remember where the order price should be set for limit or stop orders are the acronyms BLiSS and SLoBS.

Similarly, if you’re eyeing a stock worth $120, but you don’t want to purchase it at that price, you can set a limit order to buy the stock as soon as it hits $100. Keeping this market order vs. limit order comparison in mind, you can determine which approach is ideal for your portfolio. Market orders are used to buy or sell an instrument at the best available price.

Types of Limit Orders

Just remember that you cannot set a limit order to sell below the current market price because there are better prices available. Different types of orders allow you to be more specific about how you would like your broker to fill your trades. That said, limit orders are complicated because they don’t guarantee that the trade will what is limit order be executed at the set price. The stock (or other security) could hit the limit price — and there might not be enough supply or demand to complete the trade. There is also the potential for some missed opportunities, if the price you set triggers a trade, and subsequently the stock or other security hits an even better price.

Let’s say the company’s stock trades at $25 but you want to protect yourself from a big drop in the price so you decide to set a sell limit at $22. If there’s a drop and someone sells at or below $22, this triggers your order. This means that the order becomes a market order and you can sell at the next price available. The alternative to a limit order is a market order, which calls for a trade to be executed at the prevailing market price without any price limit specified.

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Even if the limit price is available after a stop price has been triggered, your entire order may not be executed if there wasn’t enough liquidity at that price. For example, if you wanted to sell 500 shares at a limit price of $75, but only 300 were filled, then you may suffer further losses on the remaining 200 shares. For example, if a stock is currently priced at $20, a trader might set a limit order to buy at $15. If the stock goes down to $16 and then back up to $20, the order won’t execute.

what is limit order
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