A limit order is an order type that specifies the price at which the trade will be executed. A limit order allows you to buy or sell a stock at a set price in the future. Only when the stock reaches the set price, or better, will the order be completed.
For example, an investor who wants to buy a stock for $20 could enter a limit order. That means that if the stock currently trades at $21, they could still set a target price of $20. However, the order will not be executed if the price does not reach $20. Limit orders are excellent for those who want to buy or sell stocks at a pre-determined price or a specific price level rather than the current market price.
It protects investors from sudden price changes in the market and ensures they get the price they want for their securities. However, it is important to note that there is no guarantee that a limit order will be filled, as the market price may never reach the specified price.
What is a Limit 'Buy' order in Invest/ISA?
It is intended to take advantage of and enter the market when the stock price makes a downward movement 📉. For example, if a stock is currently trading at $50 per share, an investor might place a buy limit order for $45 per share. If the stock price drops to $45 or below, the investor can buy the stock at that price or lower. On the other hand, if the stock price does not drop to the specified price, the order will not go through.
If the target price is not set below the current price, the order will be converted into a Market Order automatically.
Here's how to set one:
- Select your preferred instrument;
- Tap on 'Buy' followed by the 'Limit' window;
- Select the number of shares;
- Set a Price below the current one you wish to Buy the shares for;
- Review and Send Order.
What is a Limit 'Sell' order in Invest/ISA?
It is intended to secure a profit from an already opened position should the market price of the traded instrument make an upward movement 📈. For example, if a stock currently trades at $50 per share, an investor might place a sell limit order for $55 per share. The order will only be filled if the stock price rises to the specified price.
The Limit Sell price should be above the current Sell price, otherwise, it will be converted into a Market Order again.
Here's how to set one:
- Select your preferred instrument;
- Tap on 'Sell' followed by the 'Limit' window;
- Select the number of shares you wish to sell;
- Set a Price above the current one you wish to sell the shares for;
- Review and Send Order.
Note: A Limit Order will remain pending, and the funds needed for its execution - blocked, until its target price is reached. It cannot be modified unless cancelled or replaced by a new order of the same or a different type.
Pros of limit orders
One of the main pros of a limit order is giving investors greater control over the price at which they buy or sell securities. By specifying a limit price, investors can ensure that they only buy or sell securities at a price that they are comfortable with. This can be especially important in volatile markets, where prices fluctuate rapidly. Another advantage of a limit order is that it can be customised to suit an investor's specific investment strategy and goals.
Cons of limit orders
One of the main cons of a limit order is that there is no guarantee that the order will be executed. Suppose the market price never reaches the limit price. In that case, the order may not be filled, which means that the investor may miss out on an opportunity to buy or sell the security. Another disadvantage of using limit orders is that they may take longer to execute than market orders. Because limit orders require the market price to reach or exceed the specified price, the order may be filled after some time. This delay can be particularly problematic in fast-moving markets, where prices change rapidly.
Limit orders and price gaps: How do price gaps affect limit orders?
A price gap can cause limit orders to be filled at a better price than the target. For example, if a trader places a limit order to buy a stock at $60, but a sudden price gap causes the stock to open at $50, the order may be filled at $50, even though they intended to buy at a higher price.