What is the purpose of a limit order?

A limit order is designed specifically to set a maximum price that an investor is willing to pay when purchasing securities, or a minimum price they are willing to accept when selling. This type of order ensures that the investor has control over the price at which the transaction is executed, thereby protecting them from unfavorable movements in the market.

By specifying a maximum allowable price for purchase, the investor can avoid paying more than they want for a stock. For instance, if an investor places a limit order to buy a stock at $50, the order will only execute if the stock price is at $50 or lower. This strategy allows for better financial planning and risk management compared to a market order, where the transaction occurs at the current market price, potentially leading to an unexpected purchase price.

The other options do not accurately describe the purpose of a limit order. While a market order allows for buying or selling at the current market price, a limit order is distinct in that it provides price control. Purchasing securities without restrictions does not align with the defined constraints that limit orders provide. Lastly, while limit orders can be used as part of a selling strategy, the primary purpose is centered on specifying buying or selling prices rather than broader strategic implications.