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Investors often anticipate the price of a stock will decrease in the near future and are waiting to enter into a position at the right time. However, investors hate monitoring a stock for hours on end, while they patiently wait to scale into a position.
Enter buy limit orders. Buy limit orders allow investors to buy a stock or equity once a specific price is reached.
What Is a Buy Limit Order?
Buy limit orders allow investors to purchase a stock or another asset at or less than a specific price. This strategy allows traders to control exactly how much money they pay for a stock.
Buy limit orders ensure investors only pay a specific price for a stock or equity. This limits their overall exposure and mitigate risk. However, though a buy limit order guarantees a specific price point entry, it does not guarantee that the order will be filled.
Buy limit orders do not execute until the ask price reaches the target limit price or moves below it. If the stock does not move to the price specified in the buy limit order, the order will not be filled.
The buy limit order ensures the investor pays the limit price they set or lower.
How Do Buy Limit Orders Work?
A buy limit order is an order to purchase a stock or asset at a specific price (or below). It gives traders complete control over how much they pay for a specific asset. This control and flexibility reduces risk and exposure to a specific asset.
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When Would You Use Buy Limit Orders?
Envision a scenario in which a trader insists a stock will decrease in value, yet they do not want to buy shares until the stock moves all the way down to a specific trading range.
The use of a buy limit order presents an opportunity for the trader to enter the position at a specific price. Investors use buy limit orders when they believe an asset will decrease in price and want to buy the underlying asset at that time.
Buy Limit Order Example
As an example, a trader can establish a buy limit order at $5.60 for a stock that is currently trading at $6. If the stock moves down to $5.60, the buy limit order is automatically executed.
However, the buy limit order is not executed until the price dips to $5.60 or less.
Buy limit orders are also favored when there is a price improvement and the stock gaps between days.
If the trader’s buy limit order is placed at $5.60 and the order is not executed, it might benefit from the gap down on the subsequent day if the trade remains active.
The price may open much lower than the buy limit order price, meaning the entry point will be that much more appealing.
Buy Limit Order Pros and Cons
- Allows traders to control price entry point to a certain extent
- Liberates traders to focus on work, family, and other matters of importance through the automatic triggering of trades at specific prices
- Presents the opportunity to establish positions in stocks at comparably low prices
- Times the market for you
- There is the possibility that the trade request will go unfilled as there is no guarantee the price will decline to the target range
- If the stock in question is on a bull run, it might not pull back to the buy limit price, ultimately wasting the trader’s time
- Certain brokers charge comparably high commissions for buy limit orders compared to market orders
Are Buy Limit Orders Hard to Use?
Buy limit orders are not difficult to use. Even relatively new traders can figure out how to use buy limit orders. Simply ask your broker how to set up a buy limit order, or ask a financial advisor for assistance.
Bottom Line: What Is a Buy Limit Order?
Buy limit orders allow traders and investors to purchase assets at specific price. As the name suggests, this means investors are waiting for the stock or asset to decrease in value. Once it does decrease in value, the buy limit order will execute.
Though there is a risk the buy limit order will never be triggered, it provides traders with that more control over entry points in publicly traded companies and other securities.