Limit Order: A Type of Order

When one invests in various assets, he can choose from several order types. Some people may want to exercise greater control over their Investments. Investing in The stock market can be a little tricky, especially for relatively new ones. There are quite many factors to consider while buying or selling stocks. To achieve control over the Investments, you can place specific orders. One such way to do this is by implementing a limit order. 

Now you may be thinking what is a limit order? What is the limit order meaning?

Limit order definition: Limit orders means where investors specify the quantity of the shares and the price they wish to make the transaction at. Also, limit orders means allowing investors to trade securities at particular price points. The orders will only execute at a price specified. It states that you don’t want to buy or sell an asset beyond a threshold limit.

Time Durations to Use Limit Order

The market orders get set during the standard market sessions only. However, this is not the case with limited orders. Traders can enter a limit order during pre-market, standard, and even after trading sessions. The pre-market and after-hour orders are only valid for that trading session. They expire at the end of the session if they remain unfilled or canceled. Limit orders for the standard session allow you to determine the period you want them. 

Daily limit orders expire in the current trading session without carrying over to after-hour sessions. The good till canceled GTC orders carry ahead from one typical session to another. It remains open until execution, expiry, or cancellation by the trader. It is advisable that traders thoroughly check the pre-market and after our trading sessions. It is because liquidity may not match the regular market sessions.

Types of Limit Orders

Now you understand limit order meaning clearly, now let’s discuss different types of Limit orders in detail. Limit orders are becoming extremely important as the pace of the market is increasing with the use of computer algorithms. There are two kinds of limit orders investors can use.

Buy Limit Order

A buy limit order purchases the assets at a specified price or below it. It allows traders to regulate how much they spend on an investment. Buy limit orders guarantee investors the quoted price or less than that. It is a perfect option to use if you expect the value of an asset to decrease going forward. The only thing to note is that the order may not fill.  

The process to place a buy limit order: To put a buy limit order in place, you will have to determine the price limit of the asset you are buying. The limit price is the maximum amount you wish to pay. On execution of the order, it will fill at the lower price limit you have set. 

Sell Limit Order

The sell limit order works similarly. Entering the cell limit order will not fill anything less than the set price. You can set limit sell limit orders to maximize the profits when the prices of stocks touch great heights. 

Buy Stop Order

Unlike the buy limit order, buy stop orders are placed above the market price. They are activated after a certain price is reached. One the stop level is reached, the stop order will get converted into a limit order or a market order

Sell Stop Order

The sell stop is set below the market price and is activated if the price drops below it.

What are price gaps?

A price gap happens when the price of a stock moves sharply up or down with no trade in between. It might be due to earnings releases, a shift in an analyst’s prognosis, or a news release. When news or events outside of trading hours generate an imbalance in supply and demand, gaps commonly emerge at the open of major exchanges.

How do the Limit Orders Work

A limit order works by pre-specifying a price to buy or sell an asset. Suppose a trader tries to buy a particular company’s stock but may have funded less than its present value. In such a situation, the limit order will enable him to buy the stock only when its price falls to a level that the trader can afford to buy. In the same way, a trader may wish to sell the shares of stock to get funds. He may have a particular target in mind for making profits. Placing a limit order will allow him to sell the stock only when its price rises to a specific level. He will be able to hold the asset until it attains that price. The use of a limit order guarantees investors have the desired price for a stock. Limit orders thus provide greater control over the price at which thread trade executions of security occur. It is a handy tool during periods of high volatility in the market. The limit orders also allow investors to leave it open with an expiry date.

You can follow the following steps to place a limit order.

1. Select the type of transaction, i.e., buy or sell. 
2. Specify the name of the security and the number of shares you want to buy or sell.
3. Select the order type, i.e., limit order in this case.
4. Mention the order period.
5. Specify the price at which you want to execute the trade.

Example of Limit Orders

Let’s suppose a portfolio manager wants to buy the stocks of HDFC Bank, which has a share price of Rs. 280 currently. This valuation is not convincing to the portfolio manager and considers it very high. He has a specific price in mind at which he wants to buy those shares. So he can n ask his traders to buy 50 shares of HDFC Bank when it falls below Rs. 190. The traders will order to buy 50 shares with a limit of Rs. 190. The trader can start buying them when the stock price goes below this mark. The order will remain in place until the price reaches the limit set or the portfolio manager cancels it. 

Advantages of Limit Orders

Limit orders carry certain advantages, which is why traders may consider them.

1. They allow traders to get into deals and exit them with an accurate price. It helps in getting the desired objectives in trading an asset. 
2. Limit orders are beneficial when the market is very volatile. The sudden rise and fall in prices of stocks are a cause of worry for the traders. The limit orders can minimize the losses or even get some profits.
3. It May not be possible to keep track of the portfolio all the time. Limit orders save traders from the need to check the prices of stocks continuously. One can set the price for buying and selling with the expiration dates of the order.

Conclusion

Limit order is a useful tool for traders. One must learn to use it wisely to make the most of it. They’re a great tool during volatile market movements, and can be used to minimize losses while ensuring you manage to book a profit. The knowledge of when you wish to order can assist you in great ways.