What is a limit order?

• A limit order allows an investor to buy or sell a security at a specific price - an order will only execute at the given price or better.
• Limit orders give investors more control of the price they trade and the ability to capitalize on short-term market fluctuations.
• Limit orders are technical and more complicated to execute for brokers, so they may cost more than other order types.

When you invest, you can choose from different types of orders. If you want to have greater control over your investments and overall costs, you can place a specific type of order to help cap the price you're willing to buy or sell at. One way to do that is through a limit order.

What is a limit order?

Limit orders are a type of order that investors can use to set parameters for the buying and selling of securities.

Basically, you're setting a limit and stating that you don't want to buy a security beyond a certain point or sell below a certain threshold. Investors can choose a buy limit order or a sell limit order to set the limit on buying or selling, which offers more control over their investments.

Understanding how limit orders work

When using a limit order, you place a limit on how much you're willing to pay to buy a specific security or set a point that you're willing to sell at.

"You set a specific price and your order will only be filled at that price or better. For example, if a stock is trading at $20 but you are only willing to pay $15, you can enter a limit order at $15. Your order will be filled only if the price falls to $15 or below. You can also set a timeframe that you would like the limit order to remain active like one day or good til cancelled," explains Zack Purvis, CFA and founder of Halley Hill Wealth Management, a Registered Investment Adviser.

The risk with a limit order is that there are no guarantees that the order will actually go through. The stock price must meet the limit order specifications to execute properly.

There are two different types of limit orders investors can choose from:

1. Buy limit order. Sets a limit price where a security can only be bought at that price or lower.
2. Sell limit order. Sets a limit price where a security can only be sold at that price or higher.

If you want to buy shares of a company at a certain price, you can set that as your buy limit. If the company's shares fall to that limit, an order will be executed. You can also set a sell limit order to try and maximize profits if stock values soar.

While limit orders can offer control over your costs, there are some important considerations to be aware of. For example, limit orders last for only a specific period of time.

For example, you can choose from day orders that last the duration of the trading day or good-til-canceled (GTC), which remains in effect until an order is executed or you cancel. However, your brokerage may have a limit of 90 days for the order to be valid.

On top of that, you may be able to place additional conditions on your limit order such as:

• Fill or kill (FOK) - as the name suggests, the order must be 'filled' or 'killed' so if the order isn't executed right away, it'll be canceled.
• Immediate or cancel (IOC) - this type of limit order sets a limit price to buy or sell a security right away and any part of the order that can't be executed will be canceled.
• All or None (AON) - this type of order states that an order to buy or sell a security must be "all or none", meaning it must be executed in its entirety or not at all.

You can set a buy limit order or sell limit order - but a limit order may not always go through. Setting additional conditions like the above may offer even greater control over your results.

Quick tip: Consider setting extra conditions on your limit order such as FOK or IOC to have greater control over the results of the order.

Pros and cons of limit orders

Before deciding on the type of order you want to use, consider the pros and cons.

"The benefit to a limit order is being able to set a maximum price you will pay or a minimum price where you'll sell the security. This can be particularly helpful in fast-moving markets when compared to a market order. Market orders buy or sell the security at the prevailing market price, which can change quickly," notes Purvis. "The primary drawback to a limit order is that it might not be filled. The price may never reach your limit and you could potentially miss an opportunity."

Here are the main things to keep in mind.

Limit orders vs. market orders vs. stop orders

When you're buying or selling a security, you typically can choose from a limit order or market order. Limit orders are based on price, whereas market orders are based on speed and efficiency. There's also a stop order as well. Here's a breakdown on how these types of orders differ from each other.

Limit orders are set to execute at a specific price. You can choose from a buy limit order or sell limit order that will be triggered only if market conditions allow based on the limit.

Market orders execute immediately and don't regard price in the equation, although these types of orders will generally be executed at or near the current bid (for a sell order) or ask (for a buy order) price. So your order will go through, but it may be at a different cost because of price fluctuations.

Stop orders are a type of order to buy or sell when a stock reaches a certain price, which is referred to as the stop price. When that price is met, the order becomes a market order and trades right away.

The primary difference between a stop order and a limit order is that a stop order will be executed right away and could be filled at a different price based on market conditions than the set stop price. A limit order will execute only at the limit price or better.

Note: Make sure to evaluate the differences between a market order, limit order, and stop order and how these play into your overall investment strategy. Review costs, timing, and fees as well.

The financial takeaway

Investing is about maximizing gains and minimizing risk - and using different types of orders is one way to help you do that. Limit orders can help put boundaries in place for orders so you only execute a buy order or sell order at set prices.

Just make sure to be aware of the time restraints and that your order may or may not execute and always evaluate how your order types play into your investment strategy.