When you are buying, a limit order is the most you are willing to pay for an equity.
For example, if a stock is trading at $ 1.70 and you put in a GTC (Good till cancel) limit order for 1000 shares at $ 1.60, if the stock hits $ 1.60 during the trading day your order will be filled. Let's say the stock closes at $ 1.65 and the next day it gaps down to $ 1.40 at the open. Your order will be filled at $ 1.40 because your 'limit order' of $ 1.60 says you are willing to buy the stock at $ 1.60 or less, but not any more than $ 1.60.
When you are selling, the limit order says I want at least this much money to sell the stock. If the stock is trading at $ 1.50 and you place a GTC order of $ 1.60, if it hits $ 1.60 during the trading day your order will be filled. If it closes at $ 1.55 and gaps up to $ 1.80 at the open of the next day, your order will be filled at $ 1.80 because your limit has been met or exceeded.
A tip for anyone trading options - Never use a market order to purchase an option. The time value of the option can be manipulated by the market maker. If the option is highly volatile and you try to purchase it using a market order, you could end up paying dollars more than you wanted to for the option. This has happened to me personally. Won't happen again.
It's okay to use a market order to sell if you are trying to dump a stock or option during a free fall to cut your losses. That's the only time I would use one.
Topic: what is a limit order? (Read 4067 times)
