This allows you to set a limit for the amount you are willing to buy or sell a stock. A buy limit order will only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Limit orders may never be executed if the market moves quickly, or does not meet your limit instructions. Most limit orders will have an expiration date. Because this is a more complicated process than a market order, some firms might charge a higher fee. To continue with the above High Five Corporation (HFC) stock order example, below is an example of a buy limit order and a sell limit order.
- Buy Limit Order: If you put a buy limit order for High Five Corporation (HFC) at $35, you would not receive it if the price jumped to $40, from the original $30. This prevents you from paying more than you wanted to. Your brokerage would only purchase the stock for you if they could find a person who is willing to sell you shares under $35. The potential negative is that if the stock continued to rise to $50, because you put a limit at $35, you did not get the stock, and you missed the potential profit of a rising stock.
- Sell Limit Order: If you put a sell limit order for HFC at $40, it can be sold as soon as it reaches $40, but it could also be sold higher. As soon as the stock reaches $40 your broker would try to sell it. You might get $41 for example. If the stock sells at $41, and then the stock price rises to $50, you would have missed an extra $9 profit. However you still would have made money assuming you purchased it at $35, which would be a $6 profit. Remember any profit is a good profit.