What Is a Buy Limit Order?
A buy limit order is an order to purchase an asset at or below a specified price, allowing traders to control how much they pay. By using a limit order to make a purchase, the investor is guaranteed to pay that price or less.
While the price is guaranteed, the order being filled is not. After all, a buy limit order won't be executed unless the asking price is at or below the specified limit price. If the asset does not reach the specified price, the order is not filled and the investor may miss out on the trading opportunity. Said another way, by using a buy limit order the investor is guaranteed to pay the buy limit order price or better, but it is not guaranteed that the order will be filled.
If an investor expects the price of an asset to decline, then a buy limit order is a reasonable order to use. If the investor doesn't mind paying the current price, or higher, if the asset starts to move up, then a market order to buy stop limit order is the better bet.
Key Takeaways
- A buy limit order is an order to purchase an asset at or below a specified maximum price level.
- A buy limit, however, is not guaranteed to be filled if the price does not reach the limit price or moves too quickly through the price.
- Buy limits control costs but can result in missed opportunities in fast-moving market conditions.
- All order types are useful and have their own advantages and disadvantages.
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Benefits of a Buy Limit Order
A buy limit order ensures the buyer does not get a worse price than they expect. Buy limit orders provide investors and traders with a means of precisely entering a position. For example, a buy limit order could be placed at $2.40 when a stock is trading at $2.45. If the price dips to $2.40, the order is automatically executed. It will not be executed until the price drops to $2.40 or below.
Another advantage of a buy limit order is the possibility of price improvement when a stock gaps from one day to the next. If the trader places a buy order at $2.40 and the order is not triggered during the trading day, as long as that order remains in place it could benefit from a gap down. If the price opens the next day at $2.20, the trader will get the shares at $2.20 as that was the first price available at or below $2.40. While the trader is paying a lower price than expected, they may want to consider why the price gapped down so aggressively, and if they still want to own the shares.
Unlike a market order in which the trader buys at the current offer price, whatever that may be, a buy limit order is placed on a broker’s order book at a specified price. The order signifies that the trader is willing to buy a specific number of shares of the stock at the specified limit price. As the asset drops toward the limit price, the trade is executed if a seller is willing to sell at the buy order price.
Special Considerations
Since a buy limit sits on the book signifying that the trader wants to buy at that price, the order will be bid, usually below the current market price of the asset. If the price moves down to the buy limit price, and a seller transacts with the order (the buy limit order is filled), the investor will have bought at the bid, and thus avoided paying the spread. This may be helpful for day traders who seek to capture small and quick profits. For large institutional investors who take very large positions in a stock, incremental limit orders at various price levels are used in an attempt to achieve the best possible average price for the order as a whole.
Buy limit orders are also useful in volatile markets. Assume a trader wants to buy a stock but knows the stock has been moving wildly from day to day. They could place a market buy order, which takes the first available price, or they could use a buy limit order (or a buy stop order). Assume the stock closed yesterday at $10. The investor could place a buy limit at $10, assuring they won't pay more than that. If the stock opens the next day at $11, they won't be filled on the order, but they have also saved themselves from paying more than they wanted to.
Disadvantages of a Buy Limit Order
A buy limit order does not guarantee execution. Execution only occurs when the asset's price trades down to the limit price and a sell order transacts with the buy limit order. The asset trading at the buy limit order price isn't enough. The trader may have 100 shares posted to buy at that price, but there may be thousands of shares ahead of them also wanting to buy at that price. Therefore, the price will often need to completely clear the buy limit order price level in order for the buy limit order to fill. The earlier the order is put in the earlier in the queue the order will be at that price, and the greater the chance the order will have of being filled if the asset trades at the buy limit price.
Buy limit orders can also result in a missed opportunity. The price of the asset has to trade at the buy limit price or lower, but if it doesn't the trader doesn't get into their trade. Controlling costs and the amount paid for an asset is important, but so is seizing an opportunity. When an asset is quickly rising, it may not pull back to the buy limit price specified before roaring higher. Since the trader's goal was to catch a move higher, they missed out by placing an order that was unlikely to be executed. If the trader wants to get in, at any cost, they could use a market order. If they don't mind paying a higher price yet want to control how much they pay, a buy stop-limit order is effective.
Some brokers charge a higher commission for a buy limit order than for a market order. This is largely an outdated practice, though, as most brokers charge either a flat fee or no fee per order, or charge based on the number of shares traded (or dollar amount), and don't charge based on order type.
Buy Limit Order Example
Apple stock is trading at a $125.25 bid and a $125.26 offer when an investor decides they want to add Apple to their portfolio. They have several choices in terms of order types. They could use a market order and buy the stock at $125.26 (assuming the offer stays the same, and there are enough shares at that price to fill the market buy order), or they could use a buy limit at any price of $125.25 or below.
Maybe the trader believes the price will fall slightly over the next several weeks, so they place a buy limit order at $121. If Apple stock trades down to $121 (ideally $120.99 to assure the order is filled), then the investor will own shares at $121, which means significant savings from the $125.25/26 price the investor first saw.
The price may not drop to $121, though. Instead, it may move from a $125.25 bid up to $126, then $127, then $140 over the next several weeks. The price rise the investor wanted to participate in has been missed because their buy limit order at $121 was never executed.
How Do You Place a Buy Limit Order?
To place a buy limit order, you will first need to determine your limit price for the security you want to buy. The limit price is the maximum amount you are willing to pay to buy the security. If your order is triggered, it will be filled at your limit price or lower.
You will also need to decide when your buy limit order will expire. You can choose to allow your order to expire at the end of the trading day if it is not filled. Alternatively, you can choose to place your order as good 'til canceled (GTC). Your order will remain open until it is filled or you decide to cancel it. Your brokerage may limit the time you can keep a GTC order open (usually up to 90 days).
What Is a Buy Stop-Limit Order?
A buy stop-limit order combines features of a stop with a limit order. To place a buy stop-limit order, you need to decide on two price points. The first price point is the stop, which is the start of the trade's specified target price. The second price point is the limit price, which is the outside limit of the trade's price target. You must also set a time frame during which your trade is considered executable.
After your stop price has been reached, your stop-limit order converts to a limit order. Your limit order will then be executed at your specified price or better. The main benefit of a buy stop-limit order is that it enables traders to better control the price at which they buy a security.
What Happens If a Buy Limit Order Is Not Executed?
If a buy limit order is not executed, it will expire unfilled. The order could expire at the end of the trading day or, in the case of a good 'til canceled (GTC) order, it will expire once the trader cancels it. One of the benefits of a buy limit order is that the investor is guaranteed to pay a specified price or less to purchase a security. A downside, however, is that the investor is not guaranteed that their order will be executed.
As a seasoned expert in financial markets and trading, I bring a wealth of firsthand experience and in-depth knowledge to the table. Having navigated through various market conditions and executed countless trades, I am well-versed in the intricacies of order types, including buy limit orders.
Let's dive into the concepts outlined in the provided article:
Buy Limit Order:
A buy limit order is a strategic order to purchase an asset at or below a specified maximum price level. This empowers traders to control the price they pay for an asset. It provides price certainty, but the execution is contingent on the asset's price reaching or going below the specified limit.
Key Points:
- Guaranteed Price: The investor is assured of paying the buy limit order price or less.
- Execution Not Guaranteed: The order is only filled if the asset reaches or drops below the specified limit price.
- Use in Declining Markets: Suited for investors anticipating a decline in asset price.
Benefits of a Buy Limit Order:
- Price Control: Ensures the buyer doesn't pay more than expected.
- Precise Entry: Allows for precise entry into a position.
- Price Improvement: Can benefit from price gaps, obtaining a lower price if the market opens below the limit.
Special Considerations:
- Bid Position: Buy limits are bid, usually below the current market price.
- Use in Volatility: Useful in volatile markets to control costs.
Disadvantages of a Buy Limit Order:
- No Guarantee of Execution: The order may not fill if the asset doesn't reach the limit price.
- Missed Opportunities: In rapidly rising markets, the price may not pull back to the limit.
- Position in Queue: The order's position in the queue affects the likelihood of execution.
Buy Limit Order Example:
Illustrated with Apple stock, where a buy limit order at $121 allows the investor to potentially acquire shares at a lower price than the current market offer.
How to Place a Buy Limit Order:
- Determine Limit Price: Set the maximum price you are willing to pay.
- Set Expiry: Decide when the order expires (end of the day or as a good 'til canceled).
What Is a Buy Stop-Limit Order:
A buy stop-limit order combines features of a stop and a limit order. It involves setting a stop price and a limit price, converting to a limit order once the stop is reached. This order type provides better control over the buying price.
What Happens If a Buy Limit Order Is Not Executed:
If a buy limit order is not executed, it expires unfilled. The investor is guaranteed a specified price or less, but there's no assurance of order execution.
In conclusion, buy limit orders offer a valuable tool for traders seeking price control and precise entry points, but they come with inherent risks, especially in fast-moving markets. Understanding these concepts is crucial for making informed trading decisions.
