Limit Order
A limit order in the financial markets is a direction to purchase or sell a stock or other security at a specified price or better. This stipulation allows traders to better control the prices at which they trade. A limit can be placed on either a buy or a sell order:The price is guaranteed, but the filling of the order is not. Limit orders will be executed only if the price meets the order qualifications.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.
Definition: In financial markets, a limit order is an instruction to buy or sell a stock or other security at a specified price or better. This allows traders to have better control over the price at which they execute their trades. Limit orders can be placed as buy or sell orders: the price is guaranteed, but the execution of the order is not. A limit order will only be executed if the price meets the order's requirements. In contrast, a market order requires trading at the current market price without any price restrictions.
Origin: The concept of limit orders originated in early stock exchanges where traders conducted transactions face-to-face. With the advent of electronic trading systems, limit orders became more widespread and convenient. Key milestones include the introduction of electronic trading platforms in the 1970s and the rise of high-frequency trading technologies in the early 21st century.
Categories and Characteristics: Limit orders are mainly divided into buy limit orders and sell limit orders. A buy limit order is when an investor sets a maximum purchase price, and the order will only be executed if the market price is at or below this price. A sell limit order is when an investor sets a minimum selling price, and the order will only be executed if the market price is at or above this price. The main characteristic of limit orders is price control, but execution is not guaranteed.
Comparison with Similar Concepts: Limit orders and market orders are two common types of trading instructions. Market orders require trading at the current market price, with the advantage of fast execution but uncertain price. Limit orders offer price control but uncertain execution speed.
Specific Cases: Case 1: Investor A wants to buy a stock but does not want to pay more than 50 units of currency, so they set a buy limit order at 50 units. The order is executed when the market price drops to 50 units or below. Case 2: Investor B holds a stock and wants to sell it when the price reaches 100 units, so they set a sell limit order at 100 units. The order is executed when the market price rises to 100 units or above.
Common Questions: 1. Why wasn't my limit order executed? Answer: A limit order will only be executed if the market price reaches or exceeds the set price. If the market price does not reach the set price, the order will not be executed. 2. Which is better, a limit order or a market order? Answer: It depends on the investor's needs. If quick execution is desired, a market order is more suitable; if price control is desired, a limit order is more suitable.
