A limit order is an instruction given by a client to a broker, stating that a certain quantity of a security should be bought as long as the market price is below a certain threshold, and to sell the security when the market price exceeds another threshold. These instructions ensure that a client only buys within a predetermined price range and take profits once an expected high point in the market price is reached. The client can also state in a limit order that the order will expire as of a certain date, or that it is good until cancelled.
For example, a client issues a limit order, stating that the broker is to buy 1,000 shares of ABC Company when the market price drops below $10. The market price is currently at $12.00, so the broker takes no action. The company then reports lower-than-expected earnings, which drives down the market price to $9.75. The broker then buys 1,000 shares for a total price of $9,750.
A limit order keeps a client from missing an opportunity to buy and sell securities at advantageous prices.