Mastering the Order Types: Limit Orders

January 30, 2023
Learn about the types, risks, and advantages of limit orders.

Using a limit order is one way for a trader to gain better control of their order. Understanding what order types are, why and when traders use them, and what factors impact their execution can help you match an order type to your specific trade objectives.

Limit order

A limit order is an order to either buy stock at a designated maximum price per share or sell stock at a minimum price share. For buy limit orders, you're essentially setting a price ceiling—the highest price you'd be willing to pay for each share. For sell limit orders, you're setting a price floor—the lowest amount you'd be willing to accept for each share you sell. This means that your order may only be filled at your designated price or better. However, you're also directing your order to fill only if this condition occurs. Limit orders allow control over the price of an execution, but they do not guarantee that the order will be executed immediately or even at all.

When to use limit orders

Unlike market orders, which can only be executed during the standard market session, limit orders can be entered for execution during pre-market, standard, and after-hours trading sessions. Pre-market and after-hours limit orders are valid for execution only during that particular electronic trading session (7 a.m. to 9:25 a.m. ET for pre-market or 4:05 p.m. to 8 p.m. ET for after-hours sessions) and expire at the end of that session if they haven't been filled or canceled. However, limit orders for the standard trading session (9:30 a.m. to 4 p.m. ET) allow a trader to determine the duration.

Day limit orders expire at the end of the standard trading session and do not carry over to after-hours sessions. Day + extended limit orders are active during all equity trading sessions, from 7 a.m. to 8 p.m. ET and are known as seamless orders. 

Good-'til-canceled (GTC) limit orders carry forward from one standard session to the next, until executed, expired, or manually canceled by the trader. Each broker-dealer sets the expiration timeframe. At Schwab, GTC orders expire up to 180 calendar days from the date the order was submitted. Good-'til-canceled (GTC) + extended limit orders are active for all equity trading sessions, from 7 a.m. to 8 p.m. ET, and are active for up to 180 days unless executed or canceled. 

Traders should navigate pre-market and after-hours trading sessions carefully, as liquidity rarely matches that of the regular market session.

Limit order advantages

Why might traders consider entering a limit order?

Price ceilings/price floors – The ability to set a price ceiling on a purchase, or a price floor for a sale, is especially important when operating in a volatile and/or fast-moving market or trading thinly traded issues.

Pre-market and after-hours sessions – Since market orders cannot be executed during pre-market or after-hours sessions, limit orders allow traders to participate in these extended-hours trading sessions. Additionally, limit orders placed for the standard exchange trading session enable the trader to decide whether the order should remain in force during the current day only or carry over to future standard trading sessions.

Limit order risks

Limit orders offer many advantages, but in exchange for having control over the price you're paying or accepting, you'll face some tradeoffs. Therefore, you should understand the factors that affect how a limit order will execute or whether it will execute at all.

Risk of no execution – Limit orders allow you to seek a specific price or better, but they do not guarantee that an execution will occur because the price may never reach your limit price. Even if trading activity touches the limit order price for a short time, an execution still might not occur if other orders ahead of yours use all or part of the shares available at the current price. In addition, market orders are always executed prior to limit orders.

To help avoid this situation, some traders place their limit order prices slightly above the best ask price for buy limit orders or slightly below the best bid price for sell limit orders. This allows for a small amount of price fluctuation while still protecting the trader from an unexpected price execution.

Risk of partial fills – Limit orders also risk a "partial fill," an execution of some of the shares in an order, but not all of them, which leaves the unfilled shares as an open order.

While many brokerage firms offer commission-free trading, this is an important point for those trades that do carry commissions. Multiple fills on a single order within a single trading day typically involve one commission since all of the fills occur on the same day. However, executing parts of a single order across multiple days incurs a commission for each trading day on which an execution occurs. If an order executes over four days, you could pay four separate commissions.

You can lower the risk of partial executions by applying special conditions to limit orders. Specifying "all or none," "fill or kill," "immediate or cancel," and "minimum quantity" can help refine your order to suit your trading strategy. However, these special conditions can further reduce the overall chance of your order being executed.

What's next?

Limit orders can be a useful tool if your trading priority is price guarantee and you are willing to accept the risk of partial fills or your order not being executed at all.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.