Limit orders are used to set limits on your buy or sell orders. It enables a trader to place an order for a certain quantity of shares at a specific price.
So, what exactly is a limit order? How does it operate, and who does it benefit? Let’s learn more about it.
Content:
- What is a Limit Order?
- Limit Order Example
- Advantages of Limit Order
- Disadvantages of Limit Order
- Limit Order vs. Market Order
- How to place a limit order in Alice Blue
- Quick Summary
What is a Limit Order?
Simply defined, a limit order is when you set limits on your buy or sell orders. It lets an investor place an order for a certain number of shares at a certain price. For example, if a stock is trading at ₹50 and an investor wishes to acquire 100 shares at ₹45, they can use a limit order.
The moment that stock hits ₹45, the order to buy 100 shares at ₹45 will be executed. Basically, putting a limit on the price of the stock you want to buy is what “limit order” means. While selling, if an investor puts in a limit order at a certain price, the stock will not be sold for less than that price.
Limit Order Example
Let us go further into this. When trying to understand limit order, there are two things to keep in mind. A limit order depends a lot on supply and demand, as well as on chronology, which means first come, first serve. Let’s say there are four investors who want to buy shares in company X.
Each of these four investors places a limit order on the same stock at the same price of ₹250. Investor A places for 10 shares, B for 30, C for 10, and D for 100. This results in a requirement of 150 shares.
Then there are two investors who wish to sell their shares of company X for a price of ₹250. Investor J has 60 shares, and Investor K has 40 shares. This adds up to the supply of 100 shares. So this means that there are 50 fewer shares available for sale. Now, who gets them, and how many?
Here comes the role of chronology. Let’s assume that on the buying side, A, B, C, and D is the chronology of placing the orders. Meaning that A placed order first and D at the end. So, A gets 10, B gets 30, C receives 10, and D gets only 50 since only 100 are available for sale. If investor D placed the order first, all the shares would have gone to investor D, and A, B, and C would have got nothing.
Advantages of Limit Order
- It helps investors to set limits and work freely as the order will get executed automatically at the desired price.
- It can be placed as an after-market order as well.
Disadvantages of Limit Order
- It may so happen that the price of the stock never hits the desired limit.
- It is dependent on demand and supply; investors may return empty-handed.
- Even if the price hits the limit chronologically, some investors may not get the shares.
- There can be a situation where the limit set by a buyer may not even find a single seller.
Do you know what is After Market Order?
Limit Order vs Market Order
Limit order helps you define your losses. In a sell limit order, the shares will be sold at a price set by the investor or higher. Example: If the sell limit order is set at ₹100, then it will be sold at ₹100 or higher if there are higher bidders. In a buy-limit order, the shares will be purchased at a price set by the investor or lower. Example: If a buy order is set at ₹95, the shares will be purchased at ₹95 or lower, depending on availability.
A market order is a bit different. Here investors buy or sell at the best price available. This means while you may want to buy or sell at a certain price, the prices could have changed by the time your order reaches the exchange. This means that you may end up buying the shares for a little more or selling your shares for a little less. However, a market order almost always ensures that the order will be executed.
Also read: Limit Order Vs Market Order.
How to Place Limit Order in Alice Blue?
Below are the steps that would help you place a limit order easily.
- Choose the stock/F&O of your choice.
- Select whether you want to buy or sell the stock.
- Select MIS or CNC, which stands for Margin Intraday Square Off and Cash N Carry.
- Select on limit order.
- Enter the quantity and price.
- Enter stop loss value or trigger stop-loss tick size.
- Enter the trigger price at which you would like to pocket the gains.
To get a detailed understanding, watch our youtube video on How to Place orders on ANT MOBI.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to order types, and hence we bring you the other important order types that you should know:
Quick Summary
- A limit order is when you set limits on your buy or sell orders. It lets an investor place an order for a certain number of shares at a certain price.
- Advantages of Limit Order
- It helps investors to set limits and work freely as the order will get executed automatically at the desired price.
- It can be placed as an after-market order as well.
- Disadvantages of Limit Order
- It may so happen that the price of the stock never hits the desired limit.
- It is dependent on demand and supply; investors may return empty-handed.
