Limit Order Definition
If, on the other hand, we want to sell shares, we set a sell limit order, a limit price, number of shares and maturity. The limit price is the minimum that we want to receive for the securities.
If this is reached or even rises higher, the order is executed and our shares are sold. Here too, a better price can be achieved than the minimum we have set, but never a worse one.
Limit orders offer investors better control over prices than would be the case with a market order. In contrast to a market order, however, the execution of a limit order is by no means guaranteed. If the limit price is not reached, the order remains unfulfilled and expires at the end of the term.
How limit orders are used
Limit orders are used to execute buy or sell orders with a high degree of control over prices. Investors use them to ensure that they always achieve a desired price (or better price) for an exchange-traded asset.
As execution is not guaranteed (the limit price may never be reached) and the time frame remains uncertain (it may take several days for the limit price to be reached), this form is not suitable for urgent transactions. Here, the market order is the method of choice, as it is executed immediately at the current best price.
Even investors who do not want to constantly monitor the market often use limit orders to optimize their investments. The included condition allows us to place such orders in advance in order to prepare for various scenarios.
A limit order is one of the two basic options for executing an order. It focuses on the price, while the market order prioritizes the time period as an alternative.
Both variants have numerous special forms with which we can add further conditions or subtleties. For example, a buy stop limit order or a sell stop limit order can be used to realize orders with complex logic.
Buy Limit Order Example
We would like to buy securities of a company that currently has a market value of € 20 per share. However, as this value is still too high for us, we place a buy limit order with our broker for 100 shares at a price of €15 with a term of 30 days.
The price actually falls to 14 euros within the next 30 days. As this amount is below our limit price of 15 euros, which is better for us, the order is executed automatically and we receive the 100 shares for a total of 1,400 euros.
Sell limit order example
We own 100 shares in a company that are currently trading at EUR 14 per share. If their price rises, we want to sell them and realize the profits. We therefore place a sell limit order with our broker for 100 shares at a price of 20 euros with a term of 30 days.
The share price rises to 22 euros the following week! As this price is above our limit of 20 euros, which is better for us, our broker executes the order. The shares are sold from our securities account and we are credited 2,200 euros.