How does a limit order function?

A limit order is designed to buy or sell a security at a specified price or better, which is why specifying a price is central to its function. When an investor places a limit order, they indicate the maximum price they are willing to pay for a purchase or the minimum price they will accept for a sale. This allows them greater control over their transactions compared to a market order, which executes immediately at the current market price.

The efficiency of a limit order lies in its ability to protect the investor from unfavorable price movements. If the market price does not reach the specified limit, the order will not execute, hence offering potential cost savings or profit maximization opportunities. This price specificity is key to how limit orders function within the broader framework of trading strategies, enabling investors to align their market actions with their investment objectives.