Limit Order: What is a Limit Order and How is it Different from Market Order and Sell Order?
There are lots of concepts to understand well before diving into investments, so many people today now see investment as a good way of putting their money to use and so many people are willing to go into investments. A very good way of being a great investor is to be a good researcher and to also ensure that you understand certain concepts and terminologies in the investment field well. Have you heard about the concept of Limit Order before? Would you love to know what it entails? In this article, we shall be discussing the full details of a Limit Order.
1. What is a Limit Order?
A Limit Order is simply a way by which an investor attains more control over the price of selling or buying a particular commodity. It is a way of placing a limit on how much you are willing to buy or sell a specific commodity at a particular time. Limit orders work by you setting a particular point in the price of a commodity that you would like to buy or sell, and then the order is carried out that that exact point. It allows you to set parameters to the price of a commodity you are willing to buy or sell. A Limit Order can be a very good option in a scenario whereby the whole market is either rising very fast or falling very fast, it allows the investor to easily catch a commodity at a price that he is willing. Another way which Limit Order can be very useful is when the investor is not keeping track of the market activities, he can secure his trading by just setting a parameter to the price he wishes to either sell or buy the commodity; this kind of gives him safety against certain odds in the market. There are mainly two forms of limit order. There is the Buy Order where an investor sets a certain price that a commodity can be bought or even lower. There is also the Sell Order where an investor sets a certain price that a commodity can be sought or even higher. Limit orders are generally a good way of safely investing your money in a commodity at the exact price of your choice regardless of what the market price of that commodity is at that particular time, many investors adopt it asa safe and customized way of investing.
2. How is Limit Order Different from Market Order and Stop Order
These are terms that every investor should understand and be aware of when buying or selling a commodity. Limit Order laswe noted above order that aismade based on the customized price of a commodity. That is, the order can only be executed when the price of the commodity reaches the parameters that you have set when buying or selling a commodity. Market Order on the other hand is not based on the customized price of the commodity; it is rather based on efficiency and speed. Market Order focuses more on how the order would be quickly executed regardless of the current market price. A Stop Order can easily be confused with a Limit Order because it is also an order to buy or sell a particular commodity at an exact price. The main difference however is that in the case of a Stop Order, the order turns to a market order once the set price is reached, and then it trades off immediately. These three types of orders are very useful at various points so it is very good that you understand each one of them well and know when best to use them.
3. Is Limit Order A Good Choice?
A Limit Order offers you the chance of buying or selling a security at your convenient price; this alone is the most important reason why lots of investors go for this option. Like you can just set a parameter on how much price you would like to buy or sell a commodity for, and then leave to go do other things without necessarily needing to keep an eye on how the market is doing because you are certain that your order is going to be executed once the price reached the limit you have set. This gives you a reasonable level of control over the price you are willing to buy or sell a commodity- and it is a major advantage especially when you are not mainly concerned about the speed of the trade.
One major hindrance to you opting for the option of Limit Order is the fact that you might never get to see your order executed as the price you set for the Limit Order might never be reached. This will have you waiting and waiting and in the long run still not get your order executed. You cannot be sure that the price of the commodity would reach that price that you have set. Another factor is the fact that certain brokers charge high commission fees for limit orders, so this would lead to you incurring more trading costs.
Overall, Limit Order is a very good option especially when you are not in a haste to get your trade executed as it gives you a reasonable level of control over the price of commodities, and it also allows you the chance to either buy at lower prices or sell at higher prices of your choice. The main limitation is that you might have to wait long till the price of the commodity reaches the limit that you have set, and even at times, the price might not reach that limit at all which would lead to you having your orders cancelled. A limit order can also involve higher trading costs. All of these orders have their benefits and limitations, so it is very good that you make your research well, you compare your options, and then go for the one that best suits you at that particular time. Overall, Limit Order is not a bad choice.
4. Understanding Limit Order with Example
To understand what a limit order is in a much easier way, imagine that you are an investor and you would like to buy a particular commodity that is currently valued at a price of about 200 dollars, at this present time, you only have 150 dollars at hand to buy the commodity. You can set a buy limit order to buy this particular commodity at 150 dollars. This means that once the price of the commodity falls to 150 dollars or below 150 dollars, your order becomes automatically executed. Where the limitation comes in is if the price of the commodity fails to come down to 150 dollars, you have to wait and wait and in the long run, get your order cancelled if the parameters are not met.
The same thing goes for sell limit order, if you are an investor and you would like to sell a particular commodity for 200 dollars whereas the current value of the commodity is 150 dollars, you can place a limit order to get your order executed once the price of the commodity reaches 200 dollars or higher. You might however get to wait for a long time before the price of the commodity increases to that 200 dollars, and even at some time, get your order cancelled if the price of the commodity fails to reach 200 dollars.
You can leave your Limit Order open with an expiry date, once you set your limit order, it remains open unless you cancel it or it reaches the time you set as the expiry date. The main thing to understand about Limit Order is that it certainly offers the investor the ability to purchase or sell a commodity at his own desires price, though there is no guarantee that the set price would be reached.
Like we noted in the introduction of this article, a good investor needs to be someone that loves to do research and is ready to do it. Investments come with a good level of gains and risks as well and so as a good investor, your main aim should be how to increase your gains and reduce the risk involved. One of the ways of reducing the risk you are likely to be exposed to is to understand certain terms well, weighing lots of options, and then choosing the option that you feel is best for you in terms of posing lesser risk and carrying more benefits. Placing a limit order is one of those ways by which you can easily buy or sell a commodity at a price that suits you and it is one of the ways that investors adopt to limit the risk of buying securities for too high prices or selling for too low prices. Limit Order has a good advantage but sure carries its own risk like not having your orders met; generally, it is a really good option.