Based on market practices, if a trader places a limit order at a price higher than the market value, what happens?

Based on market practices, if a trader places a limit order at a price higher than the market value, what happens?

• A. The order is filled immediately
• B. The order will not execute until the price reaches the limit
• C. The trader loses the ability to buy
• D. The order is considered invalid

Answer: (B)

When a trader places a limit order at a price higher than the current market value, the order will not execute immediately. Instead, it remains open until the market price reaches the trader's specified limit price. This practice is rooted in the fundamental principles of limit orders, which allow traders to control the price they are willing to pay for a security. A limit order ensures that the trader will not purchase the security at a price higher than their designated limit, thus providing a level of protection against unfavorable price movements.

The other options do not accurately reflect how limit orders function. For instance, an immediate fill would only occur if the market price were at or below the limit price at the time of order placement, which is not the case here because the limit price is higher. The trader does not lose the ability to buy, as the order remains active until it can be filled at the limit price, and the order is considered valid as long as it is properly placed and remains within the market’s trading parameters.