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It is very important for a trader to get the best price possible while placing an order in the stock market. A buyer always wants to buy a stock at the lowest price possible and a seller wants to sell at the highest price possible. So, for managing the stock market trades, various methods and techniques exist to assist you to make a good profit and minimize loss. One of such most useful tools for crafting investing success is called a ‘limit order’. Limit orders are highly prominent in use as it helps you to avoid portfolio damage from wild price swings.
Key Takeaways
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A limit order allows you to buy or sell a stock at a specific price or better than the current market price.
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It gives traders more control over entry and exit prices than market orders.
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Buy limit orders execute at or below the limit price; sell limit orders execute at or above it.
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Limit orders help mitigate the risk of loss during periods of high market volatility.
What Is A Limit Order?
A limit order allows traders to buy or sell a stock at a specific price or better, giving them more control over execution. In simple terms, limit order meaning refers to setting a defined price threshold; buy limit orders execute at or below the set price, while sell limit orders execute at or above it. This helps investors manage entry and exit prices strategically in stock market, though execution isn’t guaranteed if the market never reaches the limit price.
In contrast, a market order executes immediately at the best available price. While it ensures quick execution, traders may not get their desired price during volatile market movements. Understanding the difference between limit order and market order helps investors balance speed, price control, and risk when executing trades.
Let's make it simpler with how limit order works with a quick example:
Buy Limit Order Example
With a buy limit order, the buyer is guaranteed to pay a price at or below the current market price. While the price is guaranteed, the execution of the limit order is not, and the order will not be filled unless the market price reaches the limit price.
Example: Assume you have decided to purchase 100 shares of ABC Company and want to pay up to ₹ 25.50 per share.
Your buy limit order would be: Buy 100 shares of ABC, limit 25.50
This buy limit order means you will not pay more than ₹. 25.50 per share. If the stock price falls below your limit before execution, you could benefit. However, if the price rises without reaching your limit, the trade will not be executed, and your funds will remain in your trading account.
Sell Limit Order Example
The transaction works similarly for a sell limit order as it does for a buy limit order.
Example: Suppose you own 100 shares in ABC company, and the current demand price is Rs 25 per share. You want to sell your shares if the demand price reaches Rs 25.50 or more. In this case, you would put a sell limit order like this:
Sell 100 shares of ABC, limit ₹25.50
This sell limit order instructs the market that your shares will not be sold for any price lower than ₹25.50 per share. If the stock price rises to Rs. 25.50 or more, the order is executed, and you collect your desired profit. However, if the price is below the value of Rs 25.50, your order will not be filled, and the shares will remain in your demat account.
Also, learn What is Stop Loss Order here.
When to Place a Limit Order?
You can place limit orders, especially when you are not in a hurry to buy or sell stocks. The limit orders are not executed immediately, so you are required to wait until your ask or bid price is reached. Usually, limit orders are placed on major resistance and support levels and it allows you to get best buying and selling prices. You can also divide buy/sell orders into multiple smaller limit orders to get an effective average cost.
Apart from this, it takes some experience to know where or when to set the limit prices. If you place a buy limit order too low, it might never be executed, which would do you no good and similarly, holds true for the sell limit orders. Once you get some experience, you will find the right spot that gets you a better stock price while making sure your order actually gets executed.
What are the Benefits of Limit Order?
The main advantage of placing a limit order is that you can place an order on the maximum price at which you want to open or close your positions. In case, the stock price reaches that level, the trade will be carried out. Therefore, limit orders allow you to execute a tarde at a defined level without having to constantly monitor the asset price.
Moreover, limit orders can also be placed after or before market hours as some brokers also allow a limit order for buying and selling stocks to be placed before and after market hours. The order will expire automatically if unfilled in the next trading session after the order is placed.
What are the Risks of Limit Order?
The biggest risk with limit orders is that there is no assurance of execution of such orders, because the stock price may never reach the amount that you have specified. In other words, if there was a specific position that you required to close or open, you would be at risk of it never being fulfilled, which might impact your trading plan.
Limit Orders vs Market Orders
When an investor wants to buy or sell a stock, they can place their order either “at the limit (price)” or “at the market (price)”.
Market orders, when placed, complete the transaction of buying or selling the stock instantly, at the market price or the best available price. The transaction price can deviate from the quoted price at the time of transaction depending on the market conditions. It is used when a quick transaction is more important than the price.
On the contrary, limit orders carry out the transactions only if the specified purchase or sell prices are met. There is no price deviation between the required price and the transaction price. It is placed when the investor has a specific price target to achieve.
Also, learn Market Order vs Limit Order here.
Things To Note About Placing Limit Orders
Here are some points to know while setting a limit order:
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Executed Within the Same Session: A limit order must be executed in the same session in which it is placed. The order will be automatically cancelled if the share price does not reach the specified limit before the close of the session.
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No Guaranteed Execution: There is no 100% guarantee that your limit order will be executed. Multiple investors can place limit orders at the same price, and execution is based on the availability of matching orders.
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Market Movement Matters: The order will only be executed once the share price hits or crosses your desired limit price.
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Long-Term Outlook: A limit order is the best choice for investors with a long-term outlook who can wait until the desired price is reached, rather than making a decision on the spot.
Also, read What is Premarket Trading in India here.
What Is Meant By A Trading Session?
A trading session is the official period of time during which buying and selling of securities takes place in the stock market. In India, the primary trading session is from 9:15 AM to 3:30 PM, but some brokers offer pre-market and after-market orders.
Limit orders can be placed during or even after trading sessions. Suppose the specified price is not met during a session. In that case, the order generally expires automatically in time, but in some cases, it may carry forward to the next session, depending on the broker's policy.
Understanding trading sessions helps enable investors to plan their strategies more effectively, particularly when placing limit orders, which are largely based on the timing of price movements. Knowing when the market is open, closed or most active can make a big difference in creating a profitable trade.
The Bottom Line
Limit orders are a smart trading tool for investors who prefer to control the prices they pay when buying or selling stock. However, it's equally important to understand how they operate within a trading session. Because all limit orders must be filled during the same trading session, investors must pay close attention to market movements and be ready to re-enter the order if it does not work.
Limit orders may be an ideal way to avoid missing out on a trading opportunity, but they are certainly not foolproof. The same mechanism that protects you from heavy losses can also limit you from taking unexpected profits. In a highly volatile market, these orders may be filled quickly and could result in you missing out on potential profits or favourable trades.
When placing such orders, always set a limit price slightly above daily price fluctuations - a point at which you are comfortable with the outcome. This is done to ensure that, although you don't know what the market conditions will be, you will manage to have more control over your investment decision.