What is a Limit Order?

Buying stocks at the right price is very important for the trader. While placing orders for buying or selling one come across different types of orders like a market order, limit order, stop-loss order etc. let’s have look on what is a limit order.

A limit order is a type of order to buy or sell an asset at a specific price or better. Limit orders are considered as the opposite of market orders. When a trader places a limit order he needs to place a specific price for buying or selling. In case of buying, his order will only get executed below or at the price he has specified. While selling, his order will get executed above or at the price he has specified.
Let’s have a look at an example.
Trader A wants to buy 200 shares of QWE Company. Stock is trading at Rs. 100. Trader A thinks stock price will drag a bit from the current level and bounce back again. If he puts limit order of 97 then when stock will come to 97 then only his order will get executed.

Difference between Limit Orders vs Market Orders

A market order will get executed at the best available current market price while limit orders will only get executed at a specific price which is predetermined.
In a market order, traders will be able to sell the desired quantity but price may fluctuate ie, the price may shoot up or go down. Whereas in limit orders participant will be able to sell fewer shares but at the desired price.

Risks of Limit Orders

There is no guarantee of execution of the limit orders and which is considered to be the biggest risk. In limit orders, traders will be able to sell the desired quantity but may not get the desired quantity. Sometimes, it reaches to your specified price but there are pending orders before your order, your order may not get executed. This is since the exchange follow a price-time priority while matching orders.