The Difference Between Limit Orders and Stop Orders

Understanding various order types enables you to precisely instruct your broker on how you want your trades to be executed. By opting for a limit order or stop order, you signal to your broker that you’re not content with the current market price of a stock. Instead, you want your order to be fulfilled only when the stock price aligns with the specific price you’ve set.

Here are the main distinctions between limit and stop orders:

1. Limit orders utilize a specified price as the minimum acceptable amount for executing a transaction, while stop orders employ a designated price to activate an order once that price has been traded.
2. The visibility of these orders in the market differs: while a limit order is visible to the market, a stop order remains concealed until it is triggered.

A limit order represents an instruction to purchase or sell a particular security at a predetermined price. It’s important to note that you can’t establish a standard limit order to buy a stock above the market price, as a more favorable price is already accessible. For instance, if you aim to buy shares of a $100 stock at $100 or less, you can set a limit order that will only be executed when the specified price becomes attainable.

Likewise, you can utilize a limit order to sell a stock when a specific price is achievable. Consider owning stock valued at $75 per share and desiring to sell if the price reaches $80 per share. Setting a limit order at $80 ensures that it will only be executed at that price or a better one. Keep in mind that setting a limit order to sell below the current market price isn’t feasible, as better prices are already available.

Stop orders manifest in various forms, all hinging on a condition linked to a price not yet accessible in the market at the time of order placement. When this future price becomes viable, the stop order is activated, but the method of execution may differ based on its type.

Many brokers include the term “stop on quote” in their order types to clarify that the stop order triggers solely when a valid quoted price in the market is reached. For instance, setting a stop order at $100 means it will only be triggered if a valid quote at $100 or better is attained.

A conventional stop order transitions into a standard market order when the stop price is met or surpassed. Furthermore, a stop order can be established as an entry order, enabling the opening of a position as the stock price rises. In this case, a stop market order could be set above the current market price, converting into a typical market order upon meeting your stop price.

A stop-limit order has the features of both limit and stop orders and consists of two prices: a stop price and a limit price. This order can activate a limit order to buy or sell a security when a specific stop price is met. For example, imagine you purchase shares at $100 and expect the stock to rise. You could place a stop-limit order to sell the shares if your forecast was wrong.

If you set the stop price at $90 and the limit price at $90.50, the order will activate if the stock trades at $90 or worse. But a limit order will be filled only if the limit price you selected is available in the market.

If the stock drops overnight to $89 per share, which is below your stop price, the order will be activated, but it will not be filled immediately because there are no buyers at your limit price of $90.50 per share. The stop price and the limit price can be the same in this order scenario.

A stop-limit order entails two main risks: the potential for no fills or partial fills. There’s a possibility that your stop price could be triggered while your limit price remains unattainable. If you used a stop-limit order as a stop-loss to exit a long position during a stock’s decline, it might not completely close your trade, leaving you with fewer valuable shares that could continue to decrease in value.

Even if the limit price becomes available after the stop price has been triggered, your entire order may not be executed if there isn’t sufficient liquidity at that price point. For instance, if you intended to sell 500 shares at a limit price of $75 but only 300 were filled, you might incur further losses on the remaining 200 shares.

A stop order circumvents the risks associated with no fills or partial fills, but because it operates as a market order, you might have your order filled at a price that is less favorable than what you were anticipating. For instance, let’s say you’ve placed a stop order at $70 on a stock that you purchased for $75 per share. If the company reports disappointing earnings after the market closes and the stock opens the following day at $60 per share, your order will trigger and you would exit the trade at $60, significantly lower than your stop price of $70.

A limit order establishes the highest price you’re willing to pay or the lowest price you’re ready to accept for a sale, while a stop order is activated when an asset hits a specific price and is executed at the subsequent available price. Additionally, limit orders are visible to the market, whereas stop orders remain concealed until triggered.

Using a limit order enables you to specify the precise price at which you’re willing to proceed with a transaction, although there’s a possibility that your order may not be executed. Conversely, a stop order allows you to enter or exit a position when a particular price is reached; however, given that it becomes a market order, it could be fulfilled at a less advantageous price than anticipated.

A stop-limit order marries the features of a limit order and a stop order, allowing you to establish two crucial prices: a stop price and a limit price. Once the stop price is hit, it activates a limit order to either buy or sell a security. Notably, the limit order will solely be executed at the limit price or better, ensuring that your trade remains within your desired price bracket.