Buy Limit Order - Explained
What is a Buy Limit Order?
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Table of ContentsWhat is a Buy Limit Order?How Does a Buy Limit Order Work?Academic Research on Buying Limit Order
What is a Buy Limit Order?
A buy limit order refers to a security purchase order within a specified price, enabling investors to select their preferred transaction price. A buy limit order enables investors to pay the specified price or even less. Although the security purchase price is guaranteed, filing the order is not i.e. if the investor fails to meet the specified price, he/she would miss the trading opportunity.
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How Does a Buy Limit Order Work?
One of the benefits of a buy limit order is that it protects buyers from negative slippage. The buyer can never trade on worse stock prices. For instance, when a buy limit order is placed in the market at $2.40 when the stock trades at $2.45, the order would automatically be executed in case the price dips to $2.40 or below. A buy limit order is placed on the brokers order book at the specified price unlike the market order that allows a trader to buy at the offered price. The short-term intraday traders receive benefits when the market trades downward to the limit price because they buy the stocks at the lower bid price and avoids the spread. On the other hand, large institutional investors are used in the attempt of achieving the best possible price for the entire order. A key limitation of this type of order is the fact that it does not guarantee execution. A limit order is triggered but not executed because any trade that happens thereafter is above the bidden limit price and it is a phenomenon that results frequently on securities that have securities. The market has to trade downwards across the spreads as well so as to lower the bid price in order to execute the limit orders. The other limitation of the limit order is the higher commissions that the brokers charge on them which discourage a lot of traders.