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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Buy Limit Order

What it is:

A buy limit order is an order to purchase a security at or below a given price.

How it works (Example):

Let's assume you want to buy 100 shares of Company XYZ, but you don't want to pay more than $5 per share for the stock. If you place a $5 buy limit order, you are instructing your broker to buy 100 shares at any price up to $5 per share.

Limit orders generally have deadlines (i.e., the latest date on which the trade may be executed before it is canceled) and they usually cost more to execute than market orders. Electronic Communication Networks (ECNs) are often used to execute limit orders because they match trades by price very quickly.

Why it Matters:

There are all kinds of limit orders. For example, if you wanted to sell your Company XYZ holdings for no less than $10 per share,  you could place a $10 limit order, meaning that your broker can execute the sale at prices no lower than $10 per share.

Buy limit orders are common because they can limit losses and guarantee profits by giving investors some sort of  specified purchase or sale price. This makes them very useful in low-volume or high-volatility markets, but is important to note that a buy limit order will not be executed if the market price does not meet the order requirements. This can be troubling for investors who need immediate liquidity or face the risk of missing a major run-up in the price of the stock.

The quantity and nature of limit orders placed with brokers can often indicate the direction in which investors anticipate a stock price trending, which makes limit-order volume interesting to watch.

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