Definition of Limit Order
Limit Order is an order to buy or sell an instrument at a specific price or better.
- For a buy limit order, the order will only be executed at the limit price or lower.
- For a sell limit order, the order will only be executed at the limit price or higher.
Advantages of Limit Order
- Price Control: You set the specific price at which you’re willing to buy or sell an instrument.
- No Immediate Filled Risk: Unlike market orders, you won’t be filled at worse price because you control the price.
Disadvantages of Limit Order
- No Guarantee of Execution: The order may not be filled if the market price doesn’t reach your specified price.
- Partial Fills: If there aren’t enough quantity available at your specified price, your order may only be partially filled.
Example of Limit Order
- To buy, you might place a buy limit order at $50. This means you are willing to buy at $50 or lower, but not above $50.
- To sell, you might place a sell limit order at $60. This means you are willing to sell at $60 or higher, but not below $60.
Quiz on Limit Order
- What is a limit order?
- A) An order to buy or sell at the market price.
- B) An order to buy or sell only at a specified price or better.
- C) An order to execute at market price once stop price is triggered.
2. If you place a limit buy order at $45, what does this mean?
- A) You are willing to buy at $45 or higher.
- B) You are willing to buy at $45 or lower.
- C) You are only willing to sell at $45.
3. A sell limit order is placed at $100. What is the highest price can be sold for under this order?
- A) $100 or higher.
- B) $100 or lower.
- C) The order will not execute at all.
4. If the current market price is $50, and you place a limit sell order at $60, when will your order be executed?
- A) Immediately at $50.
- B) Only when the price reaches $60 or higher.
- C) Only when the price drops to $40.
5. Which of the following statements about limit orders is true?
- A) They guarantee an immediate execution at the desired price.
- B) They guarantee that the order will be filled, no matter what.
- C) They provide more control over the price but might not guarantee an execution.
6. If an instrument is trading at $80, and you place a limit buy order at $75, what will happen?
- A) Your order will be executed immediately at $75.
- B) Your order will execute only if the price falls to $75 or lower.
- C) Your order will execute immediately at $80.
7. Which of these traders is most likely to use a limit order?
- A) A trader who wants to buy immediately at the best available price.
- B) A trader who wants to control the price they pay or receive.
- C) A trader who is looking to buy at any price, as quickly as possible.
8. If the market price is currently $55, and you place a limit sell order at $50, what happens?
- A) Your order will be filled at $50, regardless of the current market price.
- B) Your order will not be filled until the price reaches $50 or higher.
- C) Your order will be filled immediately at $55.
Answers
- B) An order to buy or sell only at a specified price or better.
- B) You are willing to buy at $45 or lower.
- A) $100 or higher.
- B) Only when the price reaches $60 or higher.
- C) They provide more control over the price but might not guarantee an execution.
- B) Your order will execute only if the price falls to $75 or lower.
- B) A trader who wants to control the price they pay or receive.
- C) Your order will be filled immediately at $55.
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