Explaining Buy Limit Order
A buy limit order is an order to buy a security (such as stock) at a specific price, the so called limit price. Meaning if in the future, the market price drops at or below the chosen price, the order is executed and the stock is yours. If the price does not drop as much as you anticipated, your order will expire after a certain time.
This type of order aims at catching a specific or even better (lower) price than the current market price, giving you the opportunity to precisely decide at which price you want to enter the market.
Therefore, the buy-limit order is not a market order (buying or selling at the current market price), it is an order placed on a book and meant to be executed in the future.
How far the market price and your estimated limited price will differentiate is mostly up to you. Your judgement and therefore the price gap can be influenced by the general market condition, politics, current news about the company or the sector and many other drivers.
A high amount of buy limit orders on a stock at a specific price range can indicate a deteriorating condition of the stock.
Most brokers executing these orders might charge extra fees. This must be taking into consideration when planning to place a buy limit order.
Also most times buy limit orders are considered “day orders,” which means they expire at the end of the day.
Imagine you have received money as a birthday gift and you want to invest it cleverly. As it is your first time buying stocks, you are very careful.
After closely analysing several movements of different stocks, you finally decide to buy a stake in ABC.Inc. This stock is currently trading at €158. but you only have €150. Yet, you strongly believe in the company and in a raising stock and want to buy it anyway.
What do you do?
There is an easy answer: place a buy limit order
You phone your broker and tell him to place a buy limit order at €150 for ABC.Inc. Now if the price of ABC.Inc falls to or below €150 your order will be executed. If the price does not fall to or below €150, your order will expire after a given time. As it is your debut on the market, the broker kindly does not charge any fees.