A limit order is an instruction given to a broker to buy or sell a financial instrument at a specified price or better.
Understanding limit orders
A limit order guarantees a price but does not guarantee execution. When Elephants place a limit order to buy, they set a maximum price they are willing to pay. The order will only execute if the market price drops to that limit price or lower. Conversely, a limit order to sell sets a minimum price the seller will accept. The trade executes only if the market price rises to that limit price or higher.
A market order executes immediately at the current available market price. Limit orders give traders control over the entry or exit price instead. If the asset never reaches the specified limit price, the order remains unfilled. This means the trader misses the trade entirely if the market moves in the opposite direction.
Traders attach time conditions to limit orders. A day order expires at the end of the trading session if it is not filled. A good-till-cancelled order remains active across multiple trading sessions until the trader manually cancels the order or the broker fills the order. The choice of duration depends on the trading strategy and how long the trader wants to wait for the target price.
A limit order is sometimes only partially filled. If the market reaches the limit price but there is not enough volume to complete the entire order, the broker buys or sells the available shares. The remaining portion of the order stays open until more shares become available at the target price or the order expires.
Example
Suppose an Elephant wants to buy shares in Savannah Peanuts Ltd. The stock is currently trading at 50 per share. The Elephant believes 50 is too expensive and decides 45 is a fair price. The Elephant places a buy limit order for 100 shares at 45. If the stock price stays above 45, the order sits on the broker’s order book and nothing happens. If the market price drops to 45 or lower, the broker executes the trade, buying the 100 shares at 45 or better. Later, the Elephant wants to sell those same shares and places a sell limit order at 60. The broker will only sell the shares if another market participant is willing to pay 60 or more.