A limit order is an instruction you give to buy or sell an asset at a specific price.
The instruction is usually given to a broker that will automatically execute the trade at the price you specified.
For example, if you owned shares in a company that were worth £1,000, you might want to sell them if they increase in value to £1,500. You can do this by setting a limit order.
Investors generally set limit orders to buy an asset at a low price or sell an asset at a high price. Using limit orders makes doing these things more convenient and reduces some of the risks involved.
To understand why that is, just imagine that you own some shares worth £1,000 and you want to sell them at £1,500.
The problem with this is that you probably don’t want to spend loads of time checking your brokerage account to see how much your shares are worth. But then not checking your account might result in the price going up and then back down again, meaning you miss the opportunity to sell.
By putting in a limit order, you can effectively automate this process, making it much more likely you’ll be able to buy or sell at the price you want (and you don’t have to spend the whole day checking your phone).
The other reason you might use a limit order is to sell an asset at a specific price so you don’t lose too much money.
Investors would be most likely to do this if they believe a share is going to crash and stay long for a sustained period of time.
This means that it’s used to reduce losses, as opposed to being a tool for making money.
Learn more: A guide to investment risk