What Is a Limit Order in Stock Trading?

A limit order is an order to buy or sell a stock at a specific price or better. For example, if you want to buy shares of a stock but you don't want to pay more than $50 per share, you could place a limit order to buy the stock at $50 or less. Similarly, if you want to sell shares of a stock but you only want to sell them at $100 or more, you could place a limit order to sell the stock at $100 or higher.

Limit orders are used to ensure that you don't overpay or undersell your stocks. They can be particularly useful for investors who are trying to buy or sell stocks at specific prices, rather than simply buying or selling at the current market price.

Key Features of Limit Orders

Price Control

• Buy Limit Order: Set below the current market price, indicating the maximum price the investor is willing to pay.
• Sell Limit Order: Set above the current market price, showing the minimum price the investor is willing to accept.

Execution Conditions

• The order will only be executed if the market price reaches the limit price or better.
• There's no guarantee of execution, as the stock may never reach the specified price.

Duration

• Limit orders can be set with various durations, such as a day order (valid for the trading day) or a good-till-canceled (GTC) order (remains active until executed or canceled).

Advantages of Limit Orders

• Precision: Allows traders to set exact entry and exit prices.
• Cost Control: Helps in managing trading costs by preventing purchases or sales at unfavorable prices.
• Risk Management: Useful in volatile markets to avoid buying at a peak or selling at a trough.

Challenges and Considerations

• No Execution Guarantee: If the stock doesn’t reach the specified price, the order may not be executed, potentially causing the trader to miss a trading opportunity.
• Partial Fills: In illiquid markets, only part of the order may be executed, if the available volume at the desired price is insufficient.

Example: Using a Limit Order with Infosys Stock

Suppose Infosys is currently trading at ₹1,200 per share. An investor looking to buy the stock at a lower price might place a buy limit order at ₹1,150. If the stock’s price drops to ₹1,150 or lower, the order will be executed, and the investor will purchase Infosys shares at ₹1,150 each or less.

Conversely, if an investor wants to sell Infosys stock at a higher price, they might set a sell limit order at ₹1,250. The order will only be executed if the stock’s price rises to ₹1,250 or higher.

Conclusion

Limit Orders offer traders precise control over the prices at which they buy or sell stocks, making them an essential tool for strategic trading. By setting specific price targets, investors can better manage their portfolios and trading costs, effectively implementing their investment strategies. However, the lack of execution guarantee requires traders to balance the desire for price control with the risk of missing market movements.