What Is a Limit Order?

A limit order is a type of trade order used when an investor wants to restrict or “limit” the price received or paid for a security. This is done by specifying the minimum price at which a stock will be sold or the maximum price at which a stock will be bought. Once the price reaches the limit, the order is normally filled at that price (or better) if there is sufficient trading volume at that level. On thinly traded issues, you may receive a “partial fill” meaning only part of your order was filled at the limit price.

Limit orders give investors control of the execution price, but the risk to limit orders is that they can go completely unfilled.

For example, if Tech Company B is trading at $31 and an investor wishes to buy shares at a $29 limit, they may regret this decision if Tech Company B trades down to $29.25 but then zooms upward, leaving the order unfilled. Or, it could trade down to $29 but only for a small number of shares; if the investor’s limit order is behind other limit orders at the same price, those orders must be filled first, and the price may head back up before all orders are filled.

Limit orders are most easily used on listed securities (NYSE or Amex) where an investor’s limit order becomes part of the specialist’s book and remains there until filled or canceled.

Why Use a Limit Order Over Other Types?

When using limit orders, many investors normally wait for the price to approach the limit they wish to pay and then place the order. One trick worth considering is using “odd ball” limits. Most investors place limits ending in the digits 0 or 5—for instance, buying at $25.10 or selling at $30.50. Consequently, limit orders tend to cluster around certain price points, making fills tougher since limit orders at the same price are filled by time priority. Adding a penny to buy limits (say, to $25.11) or subtracting a penny from sell limits (say, to $30.49) could increase an investor’s chance of getting shares since their order is “ahead” of the rest. Limits can also be useful for trading stocks with big spreads between the bid and offer. If the quote is $15 to buy and $15.50 to sell, an investor might place their order in between at $15.25, to lower transaction costs. In instances like that, such orders stand a good chance of being filled.