Definition
A limit order is an instruction to a broker to buy or sell a security only at a specified price or better. A buy limit executes at the limit price or lower; a sell limit executes at the limit price or higher. The trader sets a ceiling or floor and the order waits until the market reaches it.
It contrasts with a market order, which executes immediately at whatever price is available. A limit order trades certainty of execution for certainty of price.
Why it matters
How it works
When a limit order is placed, it joins the order book at its stated price. It executes only when a matching order arrives at that price or better. If the market moves away, the order simply rests unfilled until it is canceled or expires.
In options trading the limit order is especially valuable because spreads between the bid and the ask are often relatively large. Submitting a market order can mean an unfavorable fill near the worst available price. A limit order placed inside the spread — for example, near the midpoint — invites a better price, at the cost of possibly waiting or not filling. For multi-leg positions, a single net-price limit order ensures the whole structure executes at an acceptable combined cost.