What is a limit order?

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People ask me all the time about the following situation. Let’s say you want to buy a stock but you’re scared it will run up too much before you buy it.

Have you ever heard of a limit order?

A limit order allows you to specify the maximum price at which you want to buy the stock. Let’s say, for example, the stock is trading at $25 a share. However, it is volatile and you worry it’ll jump up by a few dollars.

If you put in a market order, it will be executed at the next available price. Now let’s say you put in a limit order to execute the trade at $25.02 a share. This means the only way the trade will be executed is if the stock is trading at $25.02 or lower.

Let’s say the stock takes this pattern.

  • 10 AM, $26.00  – no trade execution
  • 10:30 AM, $25.50 – no trade execution
  • 11 AM, $25.03 – no trade execution
  • 11:30 $25.01 – trade is executed

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