What is a limit order

A limit order is a type of trade instruction given to a broker that specifies the price at which a buyer is willing to buy or a seller is willing to sell a security. It is a way for investors to control the price at which they transact, ensuring that their trade will only be executed if the market price reaches or surpasses their specified limit price.

1. **Understanding Limit Orders**: A limit order is designed to protect investors by ensuring that their trades are executed at a predetermined price or better. For instance, if an investor places a buy limit order for XYZ stock at $33.50, their order will only be filled if the market price of XYZ falls to or below $33.50.
2. **Market Order Comparison**: Limit orders contrast with market orders, which are instructions to buy or sell a security at the prevailing market price without any specified price limit. Market orders guarantee execution but not price, which can be a concern for investors looking to control their trading costs or risks.
3. **Order Execution**: When a limit order is placed, it will remain open until the market price reaches the specified limit price, at which point the order is executed. If the market price never reaches the limit price, the order will not be filled.
4. **Risk Mitigation**: Limit orders can be used to mitigate risk by setting a price at which a trader is unwilling to transact, preventing them from entering or exiting a trade at a less favorable price.
5. **Examples of Limit Orders**: For example, a trader who believes that a stock will reach a certain price before declining might place a sell limit order at that price, ensuring they sell the stock only if it reaches or surpasses that price.

In conclusion, a limit order is a powerful tool for investors to manage their trading costs and risks, providing a level of control that is not available with market orders.