Limit Order

In a limit order, the investor has to specify a quantity and the desired price at which he or she wants to make the transaction. Say a share is currently trading at Rs 100 per share but the investor wants to buy it at Rs 95 per share. A limit order of say 10 shares at Rs 95 per share is placed. The order will only get executed when the share price reaches Rs 95 per share.

Limit order after or before market hours: Some brokers will also allow a limit order for buying or selling before or after market hours. The order will expire if unexecuted in the next trading session after the order is placed.

Things to Note about Placing Limit Orders 

Here are a few more points on what is limit order in trading and how does it works.

Orders Are To Be Executed In A Single Trading Session

When a limit order is placed to buy the stocks of a particular company, the order has to be executed within the same trading session. Taking the same example as above, let’s assume that a limit order to buy 10 shares of a company at Rs 95 per share was placed when the live market price of the same is trading near Rs 100 per share. If the price of the share does not reach Rs 95 and stops at any price level above Rs 95, the limit order will most probably be cancelled by the broker. Hence, one of the first factors to consider for a limit order to be successful is that the desired share price has to be achieved in the same trading session and cannot be carried over to the next day.

No 100% Guarantee of Limit Order In A Trading Session

There is no complete 100% guarantee that a limit order will be executed. Let’s understand this through an example.

There are hundreds of other investors in the market and there are high chances that at least a few investors will be placing a limit order at the same price.

Let us assume four investors place a limit order at Rs 95 at different times.

Let’s assume you are investor D and you placed an order for 15 shares at a limit price of Rs 95 per share, which is Rs 5 less than the assumed live market price.

On the sale side, there are three investors who have put up limit orders to sell their share they hold in the same company.

Let’s answer the question of why isn’t a 100% order execution guaranteed:

1. In a stock limit order, purchase orders are executed chronologically. In our example, there are only 30 shares on sale and the cumulative demand is for 50 shares. The purchase orders will then be executed on the basis of who placed the order first. In our example, investor A will get his 10 shares, investor B will get his 20 shares. C and D's orders will get canceled for that particular day because the number of shares on offer for sale were all purchased till the time C and D’s orders were reached.
2. Another reason why there is no guarantee of 100% execution of a stock limit order is, in a hypothetical scenario, it is not necessary that a buyer will definitely find a seller at the limit price. There could be chances that no seller might want to offer their shares at Rs 95. It can also happen the other way round that a seller may not find buyers at all. If in an entire trading session, no investor places a sale order at that price, the order will be cancelled. This happens, as mentioned before, because a limit order, if unexecuted, cannot be carried over to another trading session.

What is Meant by a Trading Session

A single trading session is basically one trading day of the stock market. Trading sessions in India start at 9.15 a.m and end at 3.30 p.m. and more often than not trading sessions are only on weekdays. Stock markets are shut on weekdays unless the Securities and Exchange Board of India (Sebi), our markets regulator, states otherwise. There are a few trading sessions that are scheduled on weekends.

There are some days that are earmarked as stock market holidays by Sebi. No trading is allowed on such days and most weekends.

Final Words

After being briefed with what is a limit order, what is its nature and things that need to be kept in mind, it is also important to know when a limit order really comes handy. Limit orders become useful when the markets are extremely volatile and the stock price changes by a larger amount in a few minutes. In a market order, the price that is actually taken into considerations depends on market conditions and for larger orders in extremely volatile conditions, the difference may also be huge.