What generally characterizes a limit order?

What generally characterizes a limit order?

• A. It is executed at any price available
• B. It is only executed at a specific price or better
• C. It can be modified after being placed
• D. It results in immediate execution

Answer: (B)

A limit order is fundamentally characterized by its specific pricing condition. When a trader places a limit order, they indicate that they are willing to buy or sell a security only at a specified price or at a more favorable price. This means that the order will not be executed until the market reaches that price, ensuring that the trader does not have to accept a trade at a less favorable price.

This is an essential strategy utilized by traders to maintain control over their transactions and to avoid unfavorable price movements in the market. It contrasts with market orders, which are executed at the next available price, regardless of what that price might be, highlighting why limit orders are preferred by those seeking to optimize their entry or exit points in a trade.

In addition, while limit orders can indeed be modified after being placed, this is not a defining characteristic of limit orders themselves, as modifications can apply to various types of orders. Therefore, the essence of a limit order is that it guarantees a specific price or a better one, which aligns with the correct answer.