A sell limit order is an agreement between an investor and a stock broker to sell a particular security in the financial markets when it reaches a designated price. The broker will attempt to sell this stock as close to the investor's requested price as possible. It is the job of a broker to watch the markets. As a result, this professional is able to execute trades faster because he or she has early permission from an investor to make a transaction. An investor who places a sell limit order with a broker typically is an experienced trader who makes a determination on the type of profits he or she expects to earn.
In a standard market order, an investor must communicate to a broker after a stock reaches a certain price to sell, a process which takes time and could result in lost profits. The stock market can be volatile, and even with a sell limit order, an investor does not receive a guarantee that a broker will be able to sell a security at the preferred price. Nonetheless, the chances of selling a stock at a given price and generating a certain profit can be greater with a sell limit order in place.
Once the price of a security reaches the designated price, a sell limit order evolves into a market order. This is a formal request for a broker to execute the trade. If a broker is able to execute a market order at the preferred price, an investor will reap profits on that trade if they purchased the security for less than the designated price.
A sell limit order also can be used when a stock is declining. An investor will determine the lowest possible stock price in which they could sell and still earn some profit, and that is value that he or she will set as the sell limit order price. Once a market order is in motion, profits can be compromised if a stock price moves dramatically.
Different stock brokers treat sell market orders differently. Some will charge extra fees and commissions for special limit orders, and others do not. A broker typically will look at the bid price at a stock exchange to determine when a stock is nearing a designated price. The bid price represents the highest price at which investors were most recently willing to purchase a particular stock, and that gives the broker an indication of when a stock is nearing limit order status.
The alternative to a sell limit order is a buy limit order. In this agreement, an investor advises a broker to purchase shares of a particular security when it drops to a designated price. Features of this type of market order are similar to a sell limit order, but it represents the other side of a trade.