Limit Order vs. Stop Order

Limit Order
Stop Order

Rather than continuously monitor the price of stocks, investors can place a limit order or a stop order (sometimes called a stop-loss order) with their broker. These orders are different types of instructions to execute trades when the stock price hits a certain level. While limit orders are used to guarantee the execution of a trade at the set price, stop orders are used to limit losses.

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Limit Order

Stop Order

Definition Sets maximum or minimum price to buy or sell stock. Trade executed when stock value falls below certain amount.
Advantages Guaranteed at particular price Limit losses or guarantee profit
Disadvantages Higher commission from broker. Possibly not executed if price not reached. Selling price may be lower than stop price. Can be triggered by short term fluctuations.

Contents: Limit Order vs Stop Order

That was supposed to be going up, wasn't it?
That was supposed to be going up, wasn't it?

edit How it works

A limit order sets the maximum or minimum price an investor is willing to buy or sell the stock for. If a stock you want to buy falls below the limit order price, it will be bought automatically. If a stock you own climbs above the limit order price, it will be sold automatically.

A stop order executes a trade when the security reaches a particular price. This is known as the stop price. If a stock currently trades at $50, and you put a stop order to sell it at $40, the order will only be filled if its value falls below $40. When the stop price is reached, the stop order is turned into a market order and the stock is sold at the best available price.

Stop-limit orders are also available. When the stop price is reached, the stop-limit order becomes a limit order which will be executed at a specific price or better.

edit Examples

Here's an example that illustrates how the various trading options - market, limit, stop and stop-limit orders - work for buying and selling a stock priced at $30.

A limit order is an instruction to trade shares at a specific (or better) price. For example, for an investor looking to buy a stock, a limit order at $50 means Buy this stock as soon as the price reaches $50 or lower. The investor would place such a limit order at a time when the stock is trading above $50. For someone wanting to sell, a limit order sets the floor price. So a limit order at $50 would be placed when the stock is trading at lower than $50 and the instruction to the broker is Sell this stock when the price reaches $50 or more. Such an order allows an investor to lock in profits. The trade will only execute at the set price or better.

Scenarios for stop and limit orders for a stock currently trading at $55.

A stop order, on the other hand, is used to limit losses. For example, a stop order at $50 placed by the owner of a stock currently trading at $53 means Sell this stock at the market price if the stock price hits $50. Conversely, someone looking to buy the same stock may be waiting for the right opportunity (price dip) but may want to place a stop order to buy at $58. This would limit the downside by putting a ceiling on the price she pays to acquire the shares.

In a regular stop order, once the set price is reached, the order is executed at the market price. A stop-limit order provides the option to set a stop price and a limit price, thereby once the stop price is reached, the order will not be executed until the limit price is reached.

edit Advantages

Limit orders guarantee a trade at a particular price.

Stop orders can be used to limit losses. They can also be used to guarantee profits, by ensuring that a stock is sold before it falls below purchasing price.

Stop-limit orders allow the investor to control the price at which an order is executed. The stop price and the limit price do not have to be the same.

edit Disadvantages

Limit orders may incur a higher commission from brokers. They also may never be executed if the limit price is not reached.

When a stop order is triggered, the stock is sold at the best possible price, which may be lower than the price specified by the stop order, as the trade is not instantaneous. This risk can be avoided by placing a stop-limit order, but that may prevent the order from being executed at all. Stop orders can also be triggered by a short term fluctuation in stock price. Brokerage firms have different standards for determining when a stop price has been reached, including last-sale prices or quotation prices.

As already mentioned, stop-limit orders may not be executed if the stock’s price moves away from the specified limit price. They can also be activated by short-term market fluctuations.

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Anonymous comments (1)

March 3, 2014, 2:33pm

One of the best explanation around.

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