What is a limit order in trading?

A limit order is defined as an order to buy or sell a security at a specified price or better. This type of order allows traders to have more control over the prices at which they execute trades compared to market orders, which are executed at the current market price.

When placing a limit order, a trader specifies the maximum price they are willing to pay when buying, or the minimum price they are willing to accept when selling. For instance, if a trader wants to buy a stock that is currently priced at $50, they might set a limit order at $48. This means the order will only be executed if the stock price reaches $48 or lower. Similarly, if selling, a limit order placed at $52 will only execute if the stock price is $52 or higher.

This mechanism is particularly beneficial in managing trading strategies and risk, as it prevents traders from buying or selling based on unfavorable market prices. Hence, the essence of a limit order lies in its capability to set a boundary for transactions based on price, ensuring better price control for the trader's operations.