A buy limit order is a stock market order where investors set a maximum price for buying a security. This method lets investors control their purchase price and avoid paying too much in volatile markets. Unlike market orders that execute at the current best price, buy limit orders only fill if the stock’s price reaches or falls below the specified limit, promoting disciplined investing. Working with a financial advisor can help you determine how to use buy limit orders based on different investment strategies.

What Is a Buy Limit Order?

A buy limit order is an instruction placed with a broker to purchase a specific security only if its price falls to or below a predetermined level. This type of stock order is particularly useful for investors who want to avoid overpaying for stocks or other assets.

As an example of how this would work, if a stock is currently trading at $50 per share, an investor might set a buy limit order at $45. If the stock’s price drops to $45 or lower, the order is executed automatically.

This approach is particularly useful for long-term investors, or those who use technical analysis, to identify specific entry points. Buy limit orders allow investors to strategically build their portfolios by setting precise purchase prices, which helps avoid buying at temporarily high prices.

Buy Limit Orders vs. Market Orders

A market order is an instruction to buy or sell a security immediately at the best available price. The market order prioritizes speed over price control, making it suitable for investors who need to quickly enter or exit a position. For example, if a stock is trading at $50 per share and an investor places a market order, the trade will execute immediately at the current market price, even if slight fluctuations occur during the transaction.

In contrast, a buy limit order focuses on price control by specifying the maximum price an investor is willing to pay. While this approach helps investors avoid overpaying, it introduces the risk that the order may be delayed and even not executed at all if the market price never reaches the specified limit.

Market orders are best suited for highly liquid stocks where price differences between the bid and ask are minimal. Buy limit orders, on the other hand, are more appropriate for investors aiming to capitalize on specific price targets or avoid paying too much in volatile or illiquid markets. The choice between these orders depends on the investor’s priorities – speed vs. price control – and their overall investment strategy.

Buy Limit Orders vs. Stop Orders

A stop order, also known as a stop-loss or stop-buy order, triggers a market order once the specified stop price is reached. For example, a stop-buy order is used to purchase a stock only after its price rises to or above the stop level, often signaling upward momentum. This allows investors to buy into a stock after confirming its price is trending higher.

A buy limit order, by comparison, is designed to execute only at or below a specific price, focusing on acquiring the stock at a favorable entry point. While buy limit orders aim to secure a lower purchase price, stop orders are typically used to capitalize on momentum or to protect against losses.

Generating your quiz…

Using Buy Limit Orders

Using a buy limit order lets you set up trades automatically without needing to constantly monitor the market. You need to choose a realistic limit price based on historical prices, technical indicators, or support levels to help you set up a good entry point.

Additionally, you should keep track of transaction costs, which can eat into your profits if orders are too frequent or not well thought out.

Buy limit orders can be set as “day orders,” which expire at the close of the trading session, or “good till canceled” (GTC) orders, which stay active until they are filled or canceled. However, there’s a risk that the order might not execute if the market price doesn’t reach your set limit, trading off immediate execution for price control.

Adding buy limit orders to your strategy could help you plan your market entries with the goal of managing market volatility.

Bottom Line

An investor reviewing her investment portfolio.

Buy limit orders offer investors a structured and disciplined way to approach the market by allowing them to set specific price thresholds for their trades. This strategy helps maintain control over purchase costs and can align well with long-term goals or targeted investment strategies. Potential uses include capitalizing on price dips and automating trades. By understanding how buy limit orders differ from other order types, such as market and stop orders, investors can choose the approach that best fits their objectives.

Tips for Investment Planning

A financial advisor can help you build a portfolio and manage investments for risk. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
How you distribute your investments among cash, stocks, bonds, and other assets impacts your potential return, risk and other factors. SmartAsset’s asset allocation calculator can help you divide your investments based on your risk tolerance and investment timeframe.