Buy Limit Order

Definition of a Buy Limit Order

A Buy Limit Order is a type of order utilized in the trading world. Its main aim is to purchase or buy a security at an equal or lesser price than the present market rate. This method ensures traders don't pay more than what they have intended for a specific security.

How Does a Buy Limit Order Work?

In practice, when a trader places a Buy Limit Order, they are telling the broker to buy a certain number of shares of a stock at a specified price, or lower. If the stock price drops to the desired price, the order is then executed. Hence, a Buy Limit Order persists in force until the condition for purchase is met, or until the trader decides to cancel it.

Advantages of a Buy Limit Order

One prime advantage of using a Buy Limit Order is that it locks in the price at which you would like to purchase a stock. This tactic prevents you from buying a stock at a higher price if it suddenly shoots up. Another advantage is cost control. By setting a limit on the order, you can control the maximum amount you are willing to spend on the stock.

Disadvantages of a Buy Limit Order

While a Buy Limit Order does ensure that you do not overpay for a stock, it also doesn't guarantee that the order will be fulfilled. If the stock price doesn't reach your preset limit, the order won't execute. Hence, there's a chance that you may miss the opportunity to buy the stock during its low point.

Example of a Buy Limit Order

Let's assume, for instance, you want to buy stock XYZ, currently priced at $20 per share. However, you believe that it's overpriced and would like to pay no more than $18 per share. In this case, you can place a Buy Limit Order at $18. If the share price drops to $18 or lower, your order will be executed at that price point.