1 Answer

This question can be looked at in two ways:

1. Long the Stock:  You put a BUY limit on a stock, meaning your stock will be purchased when it hits your BUY price.  For example, Apple Computer is trading at $400 you put a BUY limit at no more than $375.  There'll no trade execution until such time your price hits $375.

2. Short the Stock:  BUY limit as it pertains to shorting a stock.  When you sell short a stock, you borrow a stock from the brokerage firm and sell it in the open market.   You hope the price of the stock will decline in value in order that you can profit when the stock price does go down.  However, you'll start to lose money if the stock price continues to rise, contrary to your original expectation.  For example, you sell short Apple Computer at $400, hence, you need the stock price to dip below $400 in order to stay in the black.  If Apple Computer rises to $425, you're facing a losing trade and may elect to "Buy" the stock to close the position (covering your short) in order to minimize your loss.  You could then put a BUY limit on the stock you're shorting, say, $425 as your Buy limit price.