What Is a Limit Order?
A limit order names the worst price you are willing to accept. If a stock trades at $50.20 and you enter a buy limit at $50.00, your order will fill only if the price comes down to $50.00 or better. A sell limit at $51.00 fills only at $51.00 or above. Until those conditions are met, the order simply rests in the exchange's order book, waiting.
The contrast is with a market order, which demands immediate execution at whatever price the market offers. A market order guarantees you trade but not what you pay; a limit order guarantees your price but not that you trade at all. That trade-off between price certainty and execution certainty is one of the most fundamental choices in trading.
How Limit Orders Work in the Order Book
Modern exchanges are built on the limit order book, a ranked ledger of resting buy and sell limits organized by price and then by time of arrival. The highest resting buy limit becomes the bid and the lowest resting sell limit becomes the ask, so limit orders literally create the quotes everyone else trades against. An order priced aggressively enough to cross the spread — a buy limit at or above the current ask — executes immediately and is called marketable.
Traders also attach time-in-force instructions. A day order expires at the close if unfilled, good-til-canceled (GTC) orders persist for weeks, immediate-or-cancel (IOC) orders fill whatever they can instantly and cancel the rest, and fill-or-kill (FOK) orders execute in full immediately or not at all. Exchanges often pay small rebates to resting limit orders because they add liquidity, while charging fees to orders that remove it.
Why Limit Orders Matter
Limit orders are essential protection in thin or fast markets. A market order for an illiquid small-cap stock can sweep through several price levels and fill far from the last trade, while a limit order caps the damage by definition. During the May 2010 flash crash, market orders executed at absurd prices — some literally at a penny — while limit orders held their ground. Professionals default to limit orders for almost everything, sizing and pricing them to manage market impact.
The cost of that discipline is missed trades: a stock can run away from your limit and never come back, leaving you watching a winner you refused to chase by a nickel. For anyone interviewing for markets roles, articulating the trade-off between paying the spread for immediacy and earning the spread by resting in the book shows a real grasp of market microstructure.
