Using a Buy Limit Order - Stock Trading Order Types

A "Buy Limit Order" is one of the most common stock trading order types that are used by active traders today.

In comparison to a "Buy Market Order", this type of order can help eliminate the possibility of your order getting filled at a price further away from the current price than you would have expected otherwise.

Since using this order type can help avoid getting an adverse fill, I would consider this a type of Risk Management technique that in most cases, is available to everyone.

When entering a "Buy Limit Order" (also referred to as a "Buy Order" set at "Limit"), you enter the order by first entering the stock ticker/symbol, then selecting "Buy" and "Limit" and then you must enter the "Limit Price", which is the maximum amount you are willing to pay for shares of the stock symbol you entered.

A short description of what a "Buy Limit Order" is would be is: an order you can use to send in a request to buy shares of your selected stock, at a "limit" price (equal to or better) which you input on the order screen before sending it in to the market. This order type has no guarantee that your order will be filled due to the fact that the price may move above the limit price you entered.

Here is a simple order screen illustrating this type of order:

Buy Limit Order

Note: I have seen notices on Broker websites that state that some stocks are not eligible for "Limit" orders. I have never come across any myself, but you should be aware that it is possible based on what I have read. If you have any concerns about this, be sure to check with your individual broker. I would hope that if someone entered an order that was not eligible, that it would not be accepted. But we all know that what we hope for is not always the case.

To better understand how using a "Buy Limit Order" can be beneficial, let's first think about what happens when using a "Buy Market Order":

  • When using a "Buy Market Order", you place an order to buy X number of shares of stock at the next available price upon your order entry.

There are benefits to using a "Buy Market Order" but there are also downfalls. Let's take a look at a few and see how using a "Buy Limit Order" can help out:

  • If you enter a "Buy Market Order" on a stock with low trading volume, or even just during a low trading volume period, your order could get filled much higher than you expected. Using a "Buy Limit Order" in this case would put a limit on the price your order would be executed at, thus avoiding an adverse fill.
  • If a stock is trading at $10.50/share and you are interested in buying it, but only at a maximum of $10.00/share, you could not enter a "Buy Market Order". If you did, your order would get filled at or near the current trading price (if there was enough volume) $10.50/share.

    A solution would be to enter a "Buy Limit Order" for X number of shares at a limit of $10.00. If the price dropped to $10.00, your order would be executed (as long as there were buyers at that price level).

    This would avoid you having to pay the higher price and also avoid you having to wait around for the price to drop (see below).

The last point above, avoiding having to wait around for a price to drop) is rarely brought up. One of the downfalls of setting a limit price below the current trading price is that the stock price may not drop, and you could potentially miss out on a move higher. But, if you thought the current price was too high, and were willing to buy at a lower price, then that's what you should stick with.

There is no reason to get upset if the price doesn't drop. There will always be another trading opportunity somewhere. If you are using the lower price limit order to potentially help get a better entry price, than do it.

If you are not concerned with entering where the stock is currently trading or you find that most of your picks do indeed move higher once you find them, use a limit price closer to the current trading price. That's all there is to it.

A final tip is that if you are entering an order to buy a stock based on a newsletter or email recommendation that many other people may be entering around the same time, ALWAYS use a "Buy Limit Order". The reason is that the trading volume during this time may increase substantially enough to make the share price move, rather jump, much higher than usual between trades.

Also remember that using any type of limit order may result in your order not getting filled at all. There is no guarantee that your order will be filled using a limit order. There must be someone willing to buy/sell their shares to you at the price you specified in your order, or better.






Related "Buy Limit Order" Pages on This Site:

Return From "Using a Buy Limit Order" To "Stock Trading Risk Management"


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