Buy Limit Order

What is the Buy Limit Order?

Buy Limit Order is a a trading system wherein the trader provides instructions to buy a security only below a certain price and therefore allowing them to decide how much exact investment they wants to make in that security. The advantage is that the buyer makes decision regarding the price at which he wants to make buying transaction, although the order can be placed, it might not be filled and transaction might never actually be executed.

Buy Limit Order Example

Suppose the investor/trader wants to buy 100 shares of Microsoft Corp. The current market price is $152 per share. The investor doesn’t want to make an investment of more than $15000 in Microsoft Corp., so he decides to place a buy limit order in a market buy specifying the limit price at $150 per share with a quantity as 100 shares.

  • The market price of Microsoft Corp comes down at $150 (at least $149.99) per share, trade order of buying of 100 shares is executed, and the buyer gets his investment at the desired price and saves $200 in investments.
  • The market price of Microsoft Corp. does not change much in a direction that remains stagnant, and the buyer order remains pending and gets cancelled after a certain time as per the system.
  • The market price of Microsoft Corp. goes up to $164 in a few days, and eventually, the buyer missed the opportunity to invest in this security, which raised almost 8%. Now, if the investor wants to buy Microsoft Corp, shares he has to invest a much high amount compared to what was available before.

Although for long-term investors, these things might not matter for short-term investors and traders, buyer limit order turns out to be a much useful tool, which gives them the opportunity to enter at their desired price.

Buy-Limit-Order

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Source: Buy Limit Order (wallstreetmojo.com)

 How does it Work?

There are seven major components while placing a limit order with the broker.

  1. Transaction Type (Buy or Sell)
  2. Quantity (quantity of shares you want to buy)
  3. Name of Security (Name of company’s security listed)
  4. Order Type (Market order, limit order, stop-loss orderStop-loss OrderStop-loss order is an advanced computer-activated trade tool that is primarily used to execute a trade for a certain stock if only the predetermined price-levels are attained while trading, i.e. it sells a specific stock when it is triggered and is useful for reducing the investors' loss burden.read more)
  5. Order Period (whether it’s a margin order which is intraday or cash order for taking delivery of stock)
  6. Price (Price at which you want your trade to be executed)
  7. Order Validity (Immediate or cancel, Good till a day or good till cancelled)

While placing these investors, put all necessary details as per above mention components in the order window of the brokers terminal and place the order. If the market price of security comes down to investors desired price,  buying trade of a given quantity at a given price gets executed. If the market price does not come down to the desired price, the order will be cancelled after a certain time as per the broker system policy.

Advantages

Disadvantages

  • It is not necessary to be executed. Since it will only be executed after the price of a security falls below the desired limit order price, not just till the given price because the number of orders already in the system should also get executed.
  • It might turn in to a missed opportunity for traders or investors who want to catch the price trend of a security. Paying the right amount for the asset is important, but capturing opportunity at the right time is also the most important part for traders and investors.
  • In case of a gap down movement, if the limit order remains overnight and buying trade is executed, investors need to make an immediate decision since there is a risk of change in price trend.

Difference Between Buy Limit Order and Sell Limit Order

Basis of ComparisonBuy Limit OrderSell Limit Order
DefinitionIt is an order that gives the investor an opportunity to buy certain financial security at the desired price below the current market price, controlling how much they want to pay.Sell limit order gives the investor to sell certain financial security at a desired price above the current market price result in higher profit.
MechanismFor order to be executed, the security market price needs to fall below the limit order price.For order to be executed, the security market price needs to trade above the limit order price.
ReasonFor catching opportunity of uptrend movement of price in invested security;For booking profit in security or in case creating Short Sell to catch downtrend in security for traders;
PrincipleBuying at the right price;Profit booking or selling at a most favorable price;

Difference Between Buy Limit Order and Buy Stop Order

Basis of ComparisonBuy Limit OrderBuy Stop Order
DefinitionIt is an order that gives an investor the opportunity to buy certain financial security at a desired price below the current market price, controlling how much they want to pay.If an investor or trader wants to buy certain security above a certain price to capture a fresh uptrend or in case of Short sell Trader want to limit his losses above certain price order, which is placed in the system, is known as Buy Stop Order.
MechanismFor order to be executed, the security market price needs to fall below the limit order price.In the case of the Buy stop order price of a stock needs to go higher than the entered price in order, and then it will be treated as a market order and will be executed at the best offer price immediately.
UtilizationIt is used for buying a security at the right price and catching uptrend price movement while utilizing current small fall in price as catching the right opportunity at the right time.Buy stop order is used for capturing fresh new uptrend above a certain price indicating major movement and also for protecting profit and limiting loss in case of short sellingShort SellingShort Selling is a trading strategy designed to make quick gains by speculating on the falling prices of financial security. It is done by borrowing the security from a broker and selling it in the market and thereafter repurchasing the security once the prices have fallen.read more for traders.
FocusFocuses on capturing trade at the right price.Focuses on protection against losses and capturing fresh price uptrend in security immediately.

Conclusion

Buy Limit Order is an important facility available in the broker system for investors and traders who want a specific price for entering into buying trade. Although it does not guarantee the execution, but creates comfort in the mind of the buyer for the price if they wish to enter into buying of security. Various analyses, such as fundamental and technical analyses, are used to make a decision for the right price to place a limit order and capture opportunity. The risk involved in these can be minimized with sell stop order to avoid huge losses in case of change of price trend and manage risk in a highly volatile market.

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