What is a Limit Buy/Limit Sell?
Limit buy orders are used in finance to purchase a security at or below a certain price. This is an important strategy for investors who are looking to protect their downside risk and purchase assets at desired prices. Limit buy orders provide certainty by allowing traders to determine the maximum amount that they want to pay for a given asset, as well as the timeframe in which they want to make the purchase. This can be particularly useful if the investor is waiting for a security to reach a certain price in order to execute their trade.
It's important to note that limit buy orders are not guaranteed to be filled; there is no assurance that the security will actually hit the desired price. However, if it does, the order will be executed and the investor will acquire the asset at their desired price. Limit buy orders are also sometimes referred to as "good-till-canceled" orders because they stay active until either the desired price is met or the order is manually canceled.
Overall, limit buy orders are a great way for investors to manage their risk when trading securities. By setting their own predetermined prices and timeframes, traders can ensure that they don't overpay for assets or miss out on good deals due to market fluctuations. While it's important to understand that these orders are not always successful, they remain an effective way of controlling exposure while entering into trades.
A limit sell order is a type of stock trade that investors use to try to maximize their profits in the market. It's an order placed with a broker to sell a security at or above a certain price. This allows investors to take advantage of favorable prices while also limiting their risk and protecting against losses if the market turns against them. Limit sells are important tools for investors looking to protect their investments and ensure they realize gains when possible.
When using limit sells, investors must be aware of any fees associated with the transaction, as well as any potential taxes that may apply if their profits exceed certain thresholds. Additionally, it’s important to keep in mind that there’s no guarantee the order will be filled.
Simplified Example
Limit buying and limit selling is like buying or selling a toy at a certain price. Imagine you want to buy a toy at a toy store, but you don't want to pay more than a certain price for it. You can use a limit buy, which is like telling the toy store that you will only buy the toy if they sell it to you at a certain price. Similarly, in stock trading, a limit buy is when an investor tells a broker that they want to buy a stock at a specific price or better.
On the other hand, imagine you have a toy you no longer want and you want to sell it at a certain price. You can use a limit sell, which is like telling the toy store that you will only sell the toy if they buy it from you at a certain price. Similarly, in stock trading, a limit sell is when an investor tells a broker that they want to sell a stock at a specific price or better.
In summary, limit buying is when you tell the toy store or broker you only want to buy a toy or a stock at a certain price or better. Limit selling is when you tell the toy store or broker you only want to sell a toy or a stock at a certain price or better. This gives the trader more control over the price at which the order is executed but it also increases the risk of not being filled if the security does not reach the specified price.
History of the Term "Limit Buy/Sell"
The term "limit buy/sell" made its debut in the realm of financial markets, likely surfacing in the early 20th century coinciding with the advent of electronic trading platforms and the complexity of financial markets. Its origin can be traced back to the necessity for traders to articulate both the quantity of an asset they aimed to purchase and the highest price they were prepared to pay for it.
Examples
Stock Trading: A limit buy order in stock trading is an order to buy a stock at a specified price or better. For example, an investor wants to buy XYZ stock when the price reaches $50. They can place a limit buy order at $50. If the stock price reaches $50 or lower, the order will be executed at the best available price. If the stock price does not reach $50, the order will remain open until it is cancelled or executed.
Foreign Exchange Trading: A limit sell order in foreign exchange trading is an order to sell a currency pair at a specified exchange rate or better. For example, an investor has a certain amount of euros and wants to sell them when the exchange rate reaches 1.20 USD/EUR. They can place a limit sell order at 1.20. If the exchange rate reaches 1.20 or higher, the order will be executed at the best available exchange rate. If the exchange rate does not reach 1.20, the order will remain open until it is cancelled or executed.
Cryptocurrency Trading: A limit buy order in cryptocurrency trading is an order to buy a digital asset at a specified price or better. For example, an investor wants to buy Bitcoin when the price reaches $50,000. They can place a limit buy order at $50,000. If the price of Bitcoin reaches $50,000 or lower, the order will be executed at the best available price. If the price does not reach $50,000, the order will remain open until it is cancelled or executed. Similarly, a limit sell order in cryptocurrency trading is an order to sell a digital asset at a specified price or better. For example, an investor wants to sell Ethereum when the price reaches $2,000. They can place a limit sell order at $2,000. If the price of Ethereum reaches $2,000 or higher, the order will be executed at the best available price. If the price does not reach $2,000, the order will remain open until it is cancelled or executed.