A Buy Limit Order is an order to buy a specified number
of shares of a stock at a designated price or lower, at
a price that is below the current market price. Your limit
price, in other words, is the maximum price you are willing
to pay to purchase your shares.
Once a stock's price trades down to or below the price
you have specified, your shares will then be purchased at
that price or lower IF the stock's price continues to trade
at or below your specified price long enough for your order
to be filled.
Example: Suppose you want to own 100 shares of
Ebay Inc. (EBAY), and it is currently trading at $30 per
share. You would like to buy the shares if the stock's price
drops to $27 or less, as you feel the stock's current price
of $30 per share is slightly overvalued.
You place a Buy Limit Order @ $27 on 100 shares
of EBAY. Now suppose the price trades down to $27. As long
as the price remains below $27 per share, your shares would
then be bought at the next best available price that is
$27 per share or lower.
The main benefit of a Buy Limit Order is that you may be
able to buy the shares that you want at a price that is
below the current market price and you are able to set a
maximum on how much you're willing to spend per share. Buy
Limit Orders are great for buying short-term market pullbacks.
But, if the stock's price reaches your limit price, but
then changes direction to the upside before your order is
filled, you will not enter the trade. Also, if the price
never reaches your limit price, you again will not own any
Last, but not least, if the price drops to your limit price
and you enter the trade, there is no guarantee that the
price will not continue to drop further.