What is Limit Order? Meaning, Types, Example & How It Works

If you're new to stock trading, you might be wondering, what is limit order? The interesting part is that you may have already used one without knowing its technical name. For example, you decide to buy a stock only when its price comes to a certain level or sell it after it reaches your target price, you've essentially placed a limit order. 

A limit order is one of the most widely used as it gives investors greater control over the price at which their trades are executed. Unlike market orders, which are filled immediately at the current market price, they are executed only when the stock reaches the specified price. 

Understanding how this work can help investors and traders manage risk, avoid unfavourable price movements, and execute trades more strategically, especially during volatile market conditions.

Key Takeaways

• Purpose: It allows you to buy or sell a security at a specified price or better, giving you greater control over trade execution.
• Types: Two types: Buy limit orders and sell limit orders.
• Execution: It is executed only if the market reaches your specified price and a matching buyer or seller is available.
• Benefits: Controls execution price and helps minimise slippage, making it particularly useful during volatile market conditions. 
• Limitation: It does not guarantee execution if the desired price is never reached.

What is Limit Order?

It is an instruction given to your broker to buy or sell a stock at a specified price or better. Unlike a market order, which prioritises immediate execution, it prioritises the execution price. 

Its primary purpose is to help investors trade at a price they are comfortable with rather than accepting the prevailing market price. This makes it particularly useful in volatile markets, where prices can change rapidly and unexpectedly.

For example, if ABC Ltd. is trading at ₹500 and you place a buy limit order at ₹490, the order will execute only if the stock price comes to ₹490 or below. Similarly, if you place a sell limit order at ₹525, your shares will be sold only if the market reaches ₹525 or higher.

How Does a Limit Order Work?

This order type lets you set the price at which you want to buy or sell a stock. Instead of being executed immediately, the order is sent to the stock exchange and remains in the order book until the market reaches your specified price and a matching buyer or seller is available.

If these conditions are met, the order is executed at your limit price or a better price. Otherwise, it remains pending until it is executed, cancelled, or expires.

Types of Limit Orders

There are two primary types of limit orders, depending on whether you want to buy or sell a security. Both help investors control the execution price, but they are used for different trading objectives.

Buy Limit Order

A buy limit order is an instruction to purchase a stock at your specified price or lower. It helps ensure that you do not pay more than the maximum price you are willing to spend.

How It Works

You enter the highest price you're willing to pay for a stock. If the market price falls to that level or below and a matching seller is available, the order is executed.

Suitable Use Cases

A buy limit order is ideal when you:

• Want to purchase a stock below its current market price.
• Wish to avoid overpaying during volatile market conditions.
• Follow a predefined entry strategy based on technical or fundamental analysis.

A buy limit order suits investors who prefer entering stocks at predetermined prices instead of chasing market movements. This disciplined approach is a key part of successful equity investing. 

Sell Limit Order

A sell limit order is an instruction to sell a stock at your specified price or higher. It allows you to target a desired selling price without having to monitor the market continuously.

How It Works

You enter the minimum price you're willing to accept for your shares. The order is executed only if the market reaches that price or a higher price and a matching buyer is available.

Suitable Use Cases

A sell limit order is useful when you:

• Have a target selling price based on technical or fundamental analysis.
• Cannot monitor the market continuously but want your shares to be sold once the desired price is reached.
• Want to avoid selling during temporary price fluctuations in volatile markets.

Setting a predefined selling price encourages disciplined exits. Similarly, traders in short covering scenarios often plan their exit levels in advance to manage risk effectively. 

Example

Understanding this concept  becomes easier with a practical example.

Suppose ABC Industries Ltd. is currently trading at ₹950 per share.

Buy Limit Order Scenario

You believe the stock offers better value at ₹930, so you place a buy limit order for 100 shares at ₹930.

There are two possible outcomes:

• If the stock price falls to ₹930 or below and matching sellers are available, your order is executed.
• If the price remains above ₹930, your order stays pending until it is executed, cancelled, or expires.

Sell Limit Order Scenario

Now assume you already own 100 shares of ABC Industries Ltd., purchased at ₹900 per share. You want to book profits once the stock reaches ₹980, so you place a sell limit order at ₹980.

Again, two outcomes are possible:

• If the stock rises to ₹980 or higher and matching buyers are available, your order is executed.
• If the stock never reaches ₹980, the order remains pending and your shares are not sold.

Advantages and Limitations

They offer greater control over trade execution, but also have certain limitations that investors should keep in mind.

Advantages

• Better Price Control: Lets you buy or sell a security at your preferred price or better.
• Avoids Overpaying or Underselling: Helps ensure you don't pay more or sell for less than your desired price.
• Useful in Volatile Markets: Reduces the impact of sudden price fluctuations. These are especially useful during periods of high market volatility, helping investors avoid unfavourable execution prices when the India VIX is elevated. 
• Supports Disciplined Trading: Encourages trading based on predefined entry and exit prices.
• Suitable for Different Investors: Useful for both long-term investors and active traders.

Limitations

• No Guarantee of Execution: The order executes only if the market reaches your specified price.
• Partial Execution: Only part of the order may be filled if sufficient matching orders are unavailable.
• Missed Opportunities: The trade may not execute if the market moves away from your limit price.
• Further Price Movement: Your order may execute at the specified price, but the market could continue moving favourably afterwards. For example, you may buy at your target price only to see the stock fall even further. 
• Pending Orders: Unexecuted orders remain pending until they are executed, cancelled, or expire.

Limit Order vs Market Order

Although both limit orders and market orders are used to buy or sell securities, they differ significantly in how they are executed.

In simple terms, a market order prioritises execution, while a limit order prioritises price. The right choice depends on whether your priority is completing the trade immediately or getting your desired price.

When Should You Use a Limit Order?

It is most effective when the price at which you trade is more important than immediate execution. Some common situations where investors use this option includes:

• Buying a stock below its current market price.
• Selling a stock above the current market price to book profits.
• Trading during periods of high market volatility.
• Building long-term investment positions at attractive valuations.
• Executing swing trading or position trading strategies based on predefined entry and exit levels.
• Automatically booking profits once a target price is reached without continuously monitoring the market.

Using limit orders in these situations can help you trade with greater discipline while maintaining better control over your execution price.

Common Mistakes to Avoid While Using Limit Orders

While limit orders are straightforward, investors often make mistakes that reduce their effectiveness. Here are some common ones to avoid:

• Setting unrealistic limit prices that the market is unlikely to reach.
• Ignoring market liquidity, which may delay or prevent execution.
• Forgetting the order validity and allowing orders to expire unintentionally.
• Failing to monitor pending orders as market conditions change.
• Assuming that every limit order is guaranteed to execute.
• Using this during fast-moving market events when prices can change rapidly.

Avoiding these mistakes can improve the likelihood of successful order execution and help you trade more efficiently.

How to Place a Limit Order Using Lakshmishree

Placing a limit order through the Lakshmishree trading platform is a simple process:

1. Log in to your Lakshmishree trading account.

2. Search for the stock you want to buy or sell.

3. Click on Buy or Sell.

4. Enter your preferred limit price and the quantity and click on buy or sell.

5. Review all the order details carefully.

6. Submit the order and track its status through the Order Book.

7. If the order has not been executed, you can modify or cancel it before it expires.

Conclusion

Understanding what is limit order can help you make better trading decisions by giving you greater control over the price at which your trades are executed. By allowing you to specify your preferred buying or selling price, it helps reduce the impact of sudden market fluctuations and supports more disciplined trading decisions.

However, while they offer better price certainty, they do not guarantee execution. Choosing between a limit order and a market order ultimately depends on your investment objectives, market conditions, and whether your priority is obtaining a specific price or executing the trade immediately. Understanding how both order types work can help you make more informed and confident trading decisions.

Frequently Asked Questions (FAQs)

Disclaimer: This article is intended for educational purposes only. Please note that the data related to the mentioned companies may change over time. The securities referenced are provided as examples and should not be considered as recommendations. 

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