What Is A Limit Order – A Smart Way To Trade Stocks

Summary Points:

1. A limit order means you buy or sell shares only at the price you pick or better. It helps you choose the price, but sometimes it might not happen.
    
2. There are three types of limit orders: buy limit, sell limit, and stop limit. They help you decide how and when to buy or sell so you don’t get surprises.
    
3. Market orders happen fast. Limit orders wait for the price you want. This helps you trade smartly if you don’t mind waiting.

A limit order lets you buy or sell a security only at a set price or a better one. It guarantees you won’t pay more or sell for less, but it might not execute if the market doesn’t reach your price.

Imagine you want to buy 10 shares of Tata Motors. The current price is ₹500 per share, but you think that’s a bit expensive and want to pay less. So, you tell your broker to buy the shares only if the price falls to ₹480 or below. This instruction is called a limit order. 

If the price drops to ₹480, your order will be executed automatically, and you’ll pay ₹4,800 for the 10 shares. However, if the price never reaches ₹480, your order will remain open and won’t be executed. This way, you have full control over the price you’re willing to pay, smart, isn’t it?

Here’s a quick summary:
 

• Current price of Tata Motors: ₹500 per share
   
• Your limit price: ₹480 per share
   
• Number of shares: 10
   
• Total cost if order executes: 10 × ₹480 = ₹4,800
   
• If the price stays above ₹480, no purchase happens

Limit orders help you buy or sell stocks at prices that suit you, avoiding surprises.

In this blog, we’ll dive deeper into types of stock orders, when to use them, pros and cons, and how to place one like a pro.

Understanding the Basics of Stock Orders

Stock orders tell your broker how and when to buy or sell shares. A market order buys or sells instantly at the current price. A limit order only executes when the stock hits your chosen price.

Think of it like buying mangoes at a market:

• Market Order: You buy 2 kg immediately at ₹100/kg, no waiting, no questions.
   
• Limit Order: You offer ₹80/kg and wait. If the price drops, you get the mangoes. If not, no deal.

In stocks, it’s the same: market = speed, limit = control.

What is a Limit Order?

A limit order lets you buy or sell only at your chosen price or better. It guarantees your price but might never execute if the market doesn’t meet it.

Let’s understand it with the help of an example:

Let’s say you’re in a street food market, eyeing your favourite pani puri stall. The vendor is selling 10 puris for ₹50.

• You think, ‘Hmm… ₹50 feels a bit much. I’ll buy only if it’s ₹40.’
   
• You tell the vendor, ‘If you drop the price to ₹40 or less, save me a plate.’
   
• He smiles and says, ‘Deal, but I’ll only call you if that happens.’

Now replace pani puri with a stock, say Infosys.

• The stock is currently at ₹1,500 per share.
   
• You place a limit order to buy at ₹1,450.
   
• Your broker waits. If the stock dips to ₹1,450 or below, your order executes automatically.
   
• If it never drops that far, your order just sits there, unfilled, just like you going home hungry if the pani puri price never drops.

Why this matters:

 A limit order is like telling the market, ‘I’ll pay this much, not a paisa more.’ It protects you from overpaying, but it also means you might miss the deal if prices never touch your number.

It’s a patient investor’s best friend, like waiting for your favourite snack to go on sale, knowing it tastes even better when you get it at your price. 

Types of Limit Orders:

In trading, not every order works the same way. Limit orders put you in charge of the price you’re willing to buy or sell at. Here’s an easy breakdown of the main types of limit orders:
 

Think of limit orders as setting your own ‘deal rules’ in the market; you decide your price, and the market either agrees or leaves you waiting. Patience and the right strategy can make all the difference.

How Do Limit Orders Work?

Step 1: Define the Price & Quantity
First, decide the exact price you want and how many shares you’ll trade.
Example: You want to buy 10 shares of ABC Ltd at ₹1,200 each, which means your limit price is ₹1,200.

Step 2: Place the Order
You submit this to your broker, just like telling a shopkeeper, ‘I’ll take 10 mangoes, but only if they’re ₹120 each.’ The broker confirms and adds it to the market’s order book.

Step 3: Order Execution

Buy Limit Order:

Once you place a buy limit order, the next step is waiting to see if the market reaches your target price. Here's how execution works in real life:

• If the price falls from ₹1,250 to ₹1,190, your order executes at ₹1,190 (better than ₹1,200).
   
• Total cost = 10 × ₹1,190 = ₹11,900.
   
• If it never drops to ₹1,200 or below, you don’t get the shares like waiting for a sale that never comes.

A buy limit order protects your budget, but it comes with the risk of missing the opportunity if prices don’t move your way.

Sell Limit Order:

A sell limit order helps you set a minimum price you’re willing to accept before selling your shares. Here’s how it works in action:

• If you own 20 shares bought earlier and set a sell limit at ₹485, you’ll only sell when the price hits ₹485 or higher.
• At ₹485, you’d get 20 × ₹485 = ₹9,700.
   
• If the price stays below ₹485, you keep the shares, like refusing to sell your cricket bat unless someone offers your asking price.

 A sell limit order gives you price control, but it may delay the sale if the market doesn’t cooperate.

Step 4: Order Status

• Filled: All shares traded at your set (or better) price.
   
• Partially Filled: Only some shares trade (e.g., 6 shares sold at ₹1,200 = ₹7,200, the rest still pending).
   
• Pending: Waiting for the market price to match your limit.
   
• Cancelled: You cancel it yourself, or it expires before being filled.

Limit Order vs Stop Loss

A limit order helps you buy or sell at a fixed price or better, offering control. A stop loss automatically triggers a market or limit order when the price hits a certain level.

Let’s break down the key differences between the two using the table below:

Before you choose a trading strategy, it's essential to know how limit orders and stop loss orders behave differently in the market.
 

As you can see, limit orders aim for ideal prices, while stop loss orders protect against steep losses.

Conclusion:

A limit order lets you buy or sell stocks only at the price you want or better. It helps you control your trades so you don’t pay too much or sell too cheap. Unlike market orders that happen right away, limit orders wait for the right price. With patience and the right plan, limit orders can help you trade smartly.

FAQs:

Q1: What is the primary difference between a market order and a limit order?

A market order buys or sells immediately at the current price. A limit order buys or sells only at a specific price set by you.

Q2: How long is a limit order valid for?

Limit orders stay active until the set price is met or the order is cancelled. They usually remain valid for about three months or more.

Q3: What are the disadvantages of a limit order?

Limit orders may only fill partially, leaving you with an incomplete trade. This can be risky in fast-moving markets where prices change quickly.

Q4: When does a limit order close?

A limit order placed after market hours carries over to the next trading day and stays valid until 3:30 PM. If not executed by then, it’s automatically cancelled at market close.

Fun Fact: A limit order can happen immediately if your buy price is higher than the lowest seller’s price, or your sell price is lower than the highest buyer’s price. That’s why your order can get filled right away!
 

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