Limit Order 

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Limit Order

A limit order is an instruction to buy or sell a stock at a specified price. The specified price can be different from the market price. A limit order specifies a maximum price for buying a stock or a minimum price for selling a stock. For example, if the price of a stock is anticipated to fall from its current price, you can place a limit order to buy that stock at a specified lower price. If you want to buy 100 shares of General Electric, for example, which has fluctuated between $31 and $35 per share, you can place a limit order to buy General Electric at $31 even though the market price is $34 per share at the time the order is placed. The length of time that the order stands before being executed depends on the instructions you give to your broker. Using a good-till-canceled (GTC) order, you can have the order remain active until it is either executed or canceled. If a time limit is not specified, the order is assumed to be a day order; in that case, if the stock price does not fall to the limit price, the order is canceled at the end of the day. Similarly, a limit order to sell stock can be placed above the current market price. For example, if ExxonMobil Corporation’s stock is trading at $68 per share and you think that the stock will continue on an upward trend, you might decide to place a limit order to sell at $75 per share or higher. This order is then executed if and when ExxonMobil’s shares reach $75.

A limit order for an NYSE stock is sent from an investor’s brokerage firm to the commission broker on the exchange floor, who sees whether the order can be filled from the crowd (other commission brokers). A commission broker is an employee of a member firm on the exchange who transacts the firm’s orders on the exchange floor. If the limit order’s price does not fall within the quotes of the current bid and ask prices, the order is given to the specialist (a member of the exchange who makes a market in one or more listed stocks on the exchange). If the specialist does not execute the order, the limit order is entered into the specialist’s book for future execution. In this case the specialist is acting as a broker for the commission broker. If the price of ExxonMobil, for example, rises days or months later, the higher-priced limit orders in the specialist’s book are executed in the order in which they were entered, known as the first-in, first-out (FIFO) basis. The specialist receives part of the customer’s commission for executing this limit order.

The advantage of placing a limit order is that investors have an opportunity to buy (or sell) shares at a lower (or higher) price than the market price. The obvious disadvantage is that limit orders might never be executed if the limit prices are never reached. Placing a limit order does not guarantee that your order will be executed; with a market order, however, you are assured of execution but not the price of execution.

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