Buy Limit Order

A buy limit order is a trading system wherein the trader provides instructions to buy security only below a certain price, deciding how much exact investment they want to make in that security. It helps buyers decide the price at which they want to make a buying transaction.

A buy limit order, however, can be placed, but it might not be filled, and the transaction might never actually be executed if the set limit does not work for traders. This method is the best for investors who think asset prices might go up. Buying this order lets them purchase assets when they are within a limited price range.

Key Takeaways                                                               

• Buy limit order is a parameter instructed by the investor that determines the highest price at which a share/security is to be purchased.
• It determines the highest amount an investor is willing to invest and signifies the risk appetite.
• While buying a share/security, an investor may set a buy limit order, wherein he/she determines the highest price at which investors will buy the security. So when the fluctuating price of the security comes within this limit, the order executes.
• It can be a good way for investors to control their risk appetite, though it can cause a few missed opportunities.

A buy limit order, as the name suggests, is the trading measure that allows investors to take trades per their suitability. It gives them an opportunity to enter a trade on their own terms. They limit the buying price as soon as they sense the rise in the share prices that they want to buy.

In the event of a price rise, they buy the assets at a specific price or below that as decided.  This, in turn, helps them own the assets within their convenient limit. However, if the buy limit order moves above the market price, it leads to the non-execution of the deal.

Buy limit order is an important feature for investors and traders who want a specific price to enter a trade. Though it does not guarantee the execution, it creates comfort in the buyer’s mind for the price if they wish to enter into buying of security. Investors or traders use various analyses, such as fundamental and technical analyses, to decide the right price to place a limited order and capture opportunities. The risk in the process minimizes with a sell stop order to avoid huge losses in case of a change in price trend and manage risk in a highly volatile market.

Components

There are seven major components that investors come across while placing a limit order with the broker. These include:

1. Transaction Type (Buy or Sell)
2. Quantity (quantity of shares you want to buy)
3. Name of Security (name of company's security listed)
4. Order Type (Market order, limit order, stop-loss order)
5. Order Period (whether it's a margin order which is intraday or cash order for taking delivery of stock)
6. Price (the price at which one wants to execute trade)
7. Order Validity (immediate or cancel, good until a day or good until canceled)

Investors put all the necessary details mentioned above in the order window of the broker's terminal and place the order. If the market price of security falls to the investor's price, buying trade occurs for the given quantity at a given price. On the other hand, if the market price does not reach the limit, the order goes unexecuted after a certain time as per the broker system policy.

Let us consider a buy limit order example where an investor/trader wants to buy 100 shares of Microsoft Corp. The current market price is $152 per share. However, the investor doesn’t want to invest more than $15000 in Microsoft Corp. Hence, the person places a buy limit order specifying the limit price at $150 per share for 100 shares. In such a scenario, there can be three instances:

• The market price of Microsoft Corp falls to $150 (at least $149.99) per share, and trade for 100 shares occurs. The buyer gets the investment at the desired price and saves $200 in investments.
• The market price of Microsoft Corp. does not change much in a direction that remains stagnant. Hence, the buyer order remains pending and unexecuted after a certain time as per the system.
• The market price of Microsoft Corp. goes up to $164 in a few days, and eventually, the buyer misses the opportunity to invest in this security because if the price rise by almost 8%. If the investor wants to buy these shares, the person has to invest much more than what was available before.

Although for long-term investors, these things might not matter, it matters for short-term investors and traders. The buyer limit order is a useful tool that allows them to enter a trade at their desired price.

Knowing the advantages helps understand the buy limit order meaning better. Let us have a look at them:

• It makes sure buyers make a transaction at the price they want.
• For traders and investors, it gives the precise price as per their analysis of trade.
• If investors set the buying limit and the trade does not occur on a given day with the market price of stock moving below the limit order price the next day, the buyer will get these shares at a price below the desired price.
• Large institutional investors get the benefit of averaging the investment price. Since they prefer to place an order at a different price level instead of placing one large order at one price, this creates a high risk in case of a sudden fall.
• Buying a limit order is highly useful for the volatile period in the market, which helps many traders to avoid panic attacks, stick with the strategy and place an order at the desired price. The trade, however, executes only if the price moves below a given price.

The limit order has many pros, but at the same time, it has a few cons too:

• No guarantee for execution. The deal occurs only after the security price falls below the specified limit price.
• It might turn into a missed opportunity for traders or investors who want to catch the price trend. Paying the right amount is important, but capturing trading opportunities at the right time is even more important for traders.
• In case of a gap-down movement, if the limit order remains overnight, investors need to execute the buying trade immediately. This is because of the risk of a change in price trend.