Limit Order

Limit order is the price at which the trader wishes to execute the order to buy or sell the stock. Limit order assures the price but execution of the trade is not assured. This is because the trader might place an order at a certain price which may or may not be reached by the stock.

The trader should place an order for the stocks at a specific price at which the shares are to be bought or sold and unlike a market order where the trade gets executed immediately at the best available current price, this trade will only get executed at that specified price. Usually the limit order is placed at a price lower to the market price (for buy orders), when the trader is expecting a fall in price in the near term. Similarly, limit orders for selling the stocks are placed at a higher price than the market price, so that the stocks can be sold once that price is achieved.

Limit orders are usually used by traders investing for short term gains as they like to earn money through market fluctuations. Biggest risk of limit orders is that there is no guarantee of order execution. There are also instances that the order may get executed only partially and not all the shares that were to be traded could be executed.

An example of limit order would be a trader placing an order to buy Ashok Leyland at Rs. 120 while the current market price is Rs. 125. This order may or may not get executed depending if the share price of Ashok Leyland reaches Rs. 120. The order will not get executed if the share price is above Rs. 120. Similarly, a trader willing to sell shares of Ashok Leyland places an order at Rs. 130. Now, the order will only get executed once the share price increases and reaches Rs. 130.