# What Is a Limit Order

Buying the right security at the right price is an essential ingredient for executing a successful trade. There are various order types one can use when purchasing stocks, and one of those ways is a limit order.

Limit orders are powerful tools, and when used properly, can help you stick to your plan. Sticking to a plan and managing your emotions is essential when trading stocks, which is why limit orders are so important and commonly used.

What is a limit order and how do you use it? We’ll explain that in greater detail below.

## The Mechanics of a Limit Order

Despite how complex the world of stock trading may be, understanding the mechanics of a limit order is rather simple. Simply put a limit order is when you tell your trading platform, or broker, that you want to buy the underlying security at a specific price.

For example, if stock ABC was trading for \$98.50 a share, you may put a limit order in the system for \$90. Therefore, if the price per share reached \$90, your order would be fulfilled and you’d own your shares at that given price.

## The Guarantees of Limit Orders

Following the above example, when you place orders via the limit order method, you will not be able to purchase the underlying security if the price is trading above \$90; unless of course you cancel your initial limit order. Even if the price reaches \$90.01, it is a guarantee your limit order will not be fulfilled.

Your order is only fulfilled if/when the price reaches or drops to, or below, \$90 a share

## The Uncertainties of Limit Orders

However, one of the uncertainties with a limit order is the fact that fulfilling the order is not guaranteed. Following the above example, the price per share may never reach, or dip below, \$90 a share. This would mean your order will never be fulfilled.

This uncertainty often weighs heavily on the mind of a trader or investor. For example, imagine if stock ABC was trading for \$100 a share, and your limit order was to purchase 250 shares at \$90 a share.

You have completed your analysis and expect the price per share to reach \$125, but you want to buy on a pullback, which you expect to occur. The pullback comes, but the price dips to \$90.50, and not a cent less.

Your buy limit order was never fulfilled as the limit price per share was never reached. Once the price per share reached \$90.50, it began a 2-month climb to \$125 a share; which is exactly what your analysis told you.

If you were to have purchased 250 shares at \$90.50, you would have made a total profit of \$8,625, but because your buy limit order was for \$0.50 less per share, that profit was never realized.

### Emotionally Taxing

Despite how emotionally taxing the above point may seem, as you can always wonder or think about the profit you could have made; limit orders create discipline, and discipline in trading creates success.

It’s not inappropriate or wrong to adjust your limit order based on the reaction of the overall market, but you shouldn’t adjust your buy limit or sell limit order haphazardly or without analysis and reason.

If you did, you may be entering a position at the wrong price, and that can cost you a great deal of profit as well.

### Limit Orders Are Not the Only Way to Purchase Shares

Limit orders are not the only way to purchase shares of a company. Market orders are another common option.

A market order simply means you are willing to pay the market price for the underlying security. Paying the market price isn’t a bad thing if you expect the price to rise, however, during volatile markets the market price can change rapidly.

If the price increased by the time you placed your market order, and the order was fulfilled, you could be entering your trade at an inflated price and deal with the potential immediate pullback.

### Knowing When to Execute

Knowing when to execute a trade is incredibly complex. A limit order can certainly keep you disciplined, but by no means does a limit order guarantee that you are buying shares at the best possible price.

Limit orders simply suggest you will buy shares at your desired price, but your desired price may not be aligned with the overall direction of the security. Knowing when to buy and sell securities is a complex business, one that plenty of people struggle with.

Working with a professional financial advisor is a great way to take more control of your finances, and ensure you are taking all the variables into consideration when investing. Professional financial advisors are not only great resources to use to ensure your investment decisions are on track with your goals, but they will also help you budget properly, and ensure you are putting enough money aside for larger life expenses.