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
If 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 buy limit order in a market buy specifying the limit price at $150 per share with 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 canceled after a certain time as per 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 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 much useful tool, which gives them the opportunity to enter at their desired price.
How does it Work?
There are seven major components while placing a limit order with the broker.
- Transaction Type (Buy or Sell)
- Quantity (quantity of shares you want to buy)
- Name of Security (Name of company’s security listed)
- Order Type (Market order, limit order, stop-loss order)
- Order Period (whether it’s a margin order which is intraday or cash order for taking delivery of stock)
- Price (Price at which you want your trade to be executed)
- Order Validity (Immediate or cancel, Good till a day or good till canceled)
While placing these investors put all necessary details as per above mention components in the order window of brokers terminal and place the order. If the market price of security comes down to investors desired price, buying trade of given quantity at a given price gets executed, and if the market price does not come down to the desired price, the order will be canceled after a certain time as per broker system policy.
- It makes sure that the buyer makes a transaction at the price which he wants.
- For traders and investors, it gives the precise price as per their analysis on trade.
- If the investor keeps buying limit order in a system overnight in case trade is not executed on a given day and if on the next day market price of stock opens gap down below limit order price. The buyer will get these shares below the desired price.
- Large institutional investors get the benefit of averaging of price on investment. Since they prefer to place an order at a different price level instead of placing one large order at one price which creates high risk in case of sudden fall.
- Buying a limit order is highly useful for the volatile period in the market, which helps many traders to avoid panic attacks stick with the strategy and place an order at desire price so trade will only get executed if the price comes below a given price.
- It is not necessary to be executed. Since it will only be executed after the price of a security falls down 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 investor 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 limit order remains overnight and buying trade, is executed investor 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 Comparision||Buy Limit Order||Sell Limit Order|
|Definition||It 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.|
|Mechanism||For order to be executed, it is important for the security market price to fall below the limit order price.||For order to be executed, it is important for security market price to trade above limit order price.|
|Reason||For 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.|
|Principle||Buying at the right price.||Profit booking or Selling at a most favourable price.|
Difference Between Buy Limit Order and Buy Stop Order
|Basis of Comparision||Buy Limit Order||Buy Stop Order|
|Definition||It 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 investor or trader wants to buy certain security above certain price to capture 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.|
|Mechanism||For order to be executed, it is important for the security market price to fall below the limit order price.||In case of Buy stop order price of a stock needs to go higher than entered price in order and then it will be treated as a market order and will be executed at the best offer price immediately|
|Utilization||It 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 certain price indicating major movement and also for protecting profit and limiting loss in case of short selling for traders.|
|Focus||Focuses on capturing trade at the right price.||Focuses on protection against losses and capturing fresh price uptrend in security immediately.|
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.
This has been a guide to What is Buy Limit Order & its Definition. Here we discuss how buying limit order works along with an example, advantages, and disadvantages. You can learn more about from the following articles –