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Understanding limit orders

Limit orders are one of the various types of orders available on ArihantPlus. Some of the other order types include:

  • Market orders
  • Stop loss order
  • Cover order
  • Bracket order
  • Basket order

What is a limit order and how do limit orders work?

A limit order allows you to buy or sell stocks, ETFs or other securities at a custom price. When you place a limit order, you pick the price, known as the "limit price" at which you wish the order to fill. Your limit order then gets executed when there is enough trading volume at your price level or better to match with another order in the market.

For instance, if you place a buy limit order at ₹100 a share on XYZ stock that's trading for ₹105, the order will not be executed immediately. The broker will wait until the stock falls to ₹100 or less before it buys the stock for you. Similarly, a sell limit order placed at ₹111 on that same stock would not be executed unless the stock rose to ₹111 or higher.

Limit orders give investors more control as it allows you to decide at what price you want your order to be executed at. Also, it gives traders the ability to capitalize on short-term market fluctuations. 

Since limit orders don't execute unless conditions are met, they can be effective tools to help protect investors from unusual volatility in the stock market. However, you need to understand that with limit orders while the price of your order is guaranteed, the order being filled is not. This means your order will not be successfully executed unless the stock price does not meet your limit price.

Types of limit orders

There are two different types of limit orders:

  1. Buy limit order — A buy limit order is an order to purchase a security at the "limit price" set by the investor or lower.

  2. Sell limit orderA sell limit order is an order to sell a security at the "limit price" set by the investor or higher.

What happens if a buy limit order is not executed?

While a limit order gives you control of the price, in instances where your limit price does not hit, then your limit order expires unfilled depending on the order's validity as below: 

  • If you have placed a day order, your buy limit order will expire at the end of the trading day.
  • If you have placed a good 'til date (GTD) order, it will expire on the order expiry date set by the investor when placing the trade.

The bottom line 

Limit order is a great tool that allows you to get your buy or sell order executed at a price dictated by you or better. It gives you more control.

You should, however, be aware that limit orders aren't guaranteed to execute. There must be a buyer and seller on both sides of the trade. If there aren't enough shares in the market at your limit price, it may take multiple trades to fill the entire order, or the order may not be filled at all. If order execution is your priority over price, then you should place a market order.

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