A buy limit order is an order to purchase an asset at or below a specified price, giving traders control over how much they pay. By using a limit order to make a purchase, the investor is guaranteed to pay that price or less. However, fulfillment of the order is not assured. The order will only get executed if the asset’s asking price is at or below the specified limit price. If the asset doesn’t reach this specified price, the order remains unfilled, potentially causing the investor to miss out on the trading opportunity.
Key Takeaways
- A buy limit order allows the purchase of an asset at or below a specified maximum price.
- Fulfillment is not guaranteed if the asset does not reach the limit price or moves past it quickly.
- Buy limits control costs but may result in missed opportunities in fast-moving markets.
- All order types come with their own set of advantages and limitations.
Benefits of a Buy Limit Order
A buy limit order ensures the investor doesn’t get a worse price than expected. For instance, a buy limit order placed at $2.40 for a stock trading at $2.45 will only execute if the price drops to $2.40 or lower. Another advantage is the possibility of “price improvement.” For example, if the price of a stock gaps down and opens the next day at $2.20 instead of $2.40, the buy order will be executed at $2.20, allowing the investor to benefit from the price drop.
Unlike a market order, which executes at the current offer price, a buy limit order is placed on the broker’s order book at a specified limit price. The order signifies that the trader is willing to purchase a specific number of shares at this price. When the asset price drops to or below the limit price, the order is executed if a seller is willing to sell at that price.
Special Considerations
Buy limit orders are generally set below the current market price and remain on the broker’s order book. They provide an opportunity to buy at the bid price, thus avoiding the spread. This can be useful for day traders or large institutional investors, who seek tiny price increments for high frequency trades. These orders are also handy in volatile markets, where setting a limit offers more control over the maximum price you’re willing to pay.
Disadvantages of a Buy Limit Order
The primary disadvantage of a buy limit order is the lack of execution guarantee. In a scenario where many buyers compete at the same limit price, your order may be missed if it wasn’t placed early enough. Additionally, an investor may miss profitable moves as the asset quickly moves above the limit price before your order executes. In rapidly rising markets, this can translate to missed opportunities for gains. Higher commissions might also apply to buy limit orders compared to market orders, albeit this is becoming less common as brokerage fee structures evolve.
Buy Limit Order Example
Suppose Apple stock is trading at a $125.25 bid and a $125.26 offer. You wish to buy Apple shares but believe the price could decline. You could place a buy limit order at $121. If the stock drops to $121 or lower, your order executes, giving you shares at $121. If the price climbs to $140 without hitting $121, your order remains unfilled, and you miss the potential gains.
Placing a Buy Limit Order
To place a buy limit order, determine the maximum price you’re willing to pay. The limit price is this specified maximum. Decide when your order will expire: at the end of the trading day, or as a good ’til canceled (GTC) order. GTC orders remain open until they’re filled or canceled, subject to brokerage constraints (typically up to 90 days).
What Is a Buy Stop-Limit Order?
A buy stop-limit order combines features of stop and limit orders. You need to specify a stop price and a limit price with a time frame for execution. Once the stop price is reached, the order converts to a limit order and attempts to execute at the limit price or better. This provides more control over purchase pricing.
What Happens If a Buy Limit Order Is Not Executed?
If a buy limit order isn’t executed, it will expire unfilled—either at the end of the trading day or when you cancel a GTC order. The chief benefit is that you’re guaranteed not to pay above the limit price, but the downside is the lack of guarantee on execution.
Related Terms: market order, stop-limit order, stop order, GTC order, slippage.
