What Is a Buy Limit Order?
A buy limit order enables investors to set a specific price dictating the maximum they are willing to pay for a stock or other asset, and ensures that they don't pay more than this price. Buy limit orders give investors control over the purchase price of a security.
Tip: A buy limit order specifies the maximum price that an investor is willing to pay for a particular security.
Investors use buy limit orders to avoid paying more than a certain price for a security. Buy limits can be especially advantageous during times of market volatility, where stock prices are more likely to trade over a large price range. The trade price is guaranteed to be no higher than the amount set in the buy limit order, but if the stock does not fall to or below that price, the order will not be executed.
Buy Limit Order vs. Sell Limit Order
A buy limit order specifies the maximum price an investor is willing to purchase a particular security for. A sell limit order, meanwhile, specifies the minimum price an investor is willing to accept to divest that holding.
Buy Limit vs. Market Order
Limit orders differ from market orders because a market order to purchase a security is guaranteed to be executed at whatever the best available price is. A buy limit order is only executed if the security price falls to or below the limit price specified in the order. Market orders will succeed in buying or selling a security as quickly as possible, without regard to the price.
How a Buy Limit Order Works
When investors enter a buy limit order with their brokerage, it is only executed if the order can be transacted at a price at or below the limit price specified in the order. When placing the buy order investors must select between a market order or a limit order, and if they opt for a limit order they must specify a limit price.
A buy limit order isn't guaranteed to execute, or fill completely, if that security does trade at the limit price. It's always possible that orders from other investors get filled first at the same price, or that fewer shares are traded at the limit price than the investor's order size.
Since execution is not guaranteed for limit orders, investors must specify for how long they're willing the limit order to remain active.
- A day order will expire at the next market close if it is not executed.
- A good 'til canceled ((GTC)) order will remain open indefinitely if it is not executed. Some brokers have maximum periods they allow GTC orders to remain open for, such as 1 month. It's possible for GTC orders to be executed over multiple trading days.
Buy Limit Order Example
Let's assume an investor wants to buy 1,000 shares of Company A, that the stock is currently trading at $100/share, and that the investor expects the price to fall in the near term. The stock may be volatile, so the investor is hoping to be able to buy shares on a downswing. The investor decides to enter a buy limit order for 1000 shares at a limit price of $95. The investor also opts for a GTC order.
On the day the GTC buy limit order is placed, Company A's shares dip to $97. A few days later Company A's shares briefly touch $95, causing 300 shares of the investor's buy limit order to fill. At this point the order remains open with 700 shares outstanding. A week later shares of Company A drop to $94 mid-session, resulting in the remaining 700 shares on order to be executed at $95. In this example, the investor has successfully purchased a cumulative 1,000 shares of Company A over multiple trading days. Typically a broker will charge a trade commission for every day part of the order is executed (which is 2 days in the above example).
Pros & Cons of a Buy Limit Order
Pros
- Buy limit orders give investors control over how much they pay for a particular security.
- They are helpful during times of volatility where stock prices are more likely to trade over a large price range.
- They enable investors to potentially benefit from price gaps that occur between regular trading sessions. If shares drop significantly in price during premarket or after-hours trading, a buy limit order may fill below the limit price.
Cons
- Buy limit orders are not guaranteed to execute because they remain outstanding until the security price falls to or below the price set in the order.
- Being selective on trade price could cause investors to miss out on tremendous profits; buy limit orders may sit unfilled as a stock doubles or triples in value.
- The cost of placing a buy limit order may be higher than the cost of placing a market order, depending on the broker, although this is less common today than in the past.
Tip: A buy limit order can be helpful during times of volatility, but investors may miss out on potential profits if a stock price rises significantly without the trade being executed.
Bottom Line
A buy limit order is a valuable piece of an investor's toolkit because it enables them to set limits on how much they pay to purchase a security. Buy limit orders can be especially valuable during times of heightened volatility. The risk of buy limit orders is that they are not filled.
