Limit Order vs. Stop Order – What’s the difference?

If you’re new to the world of stock market trading, you may wonder just what the difference between limit orders and stop orders is. While both types of orders help investors ensure that their securities are purchased at the desired price, they also have some key differences you should understand before placing your order. This guide will walk you through the differences between limit orders and stop orders to make more informed investment decisions in the future.

What are Limit Orders?

A limit order is to buy or sell a security at a specified price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Limit orders are not guaranteed to execute. For example, if you place a buy limit order for $10 and the market falls before your order executes, it will never happen. However, with a stop order, once the stop price has been triggered, your stop order becomes a market order.

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Disadvantages of Limit Order

  1. A limit order is to buy or sell a security at a specified price or better.
  2. A stop order, also called a stop-loss order, is an order to buy or sell a security once the security price reaches a specified price, known as the stop price.
  3. If you place a limit order, you may miss out on potential profits if the stock price exceeds your limit price.

What are Stop Orders?

A stop order is an order to buy or sell a security at a pre-specified price. This order limits an investor’s loss or protects a profit on a security position. A stop order is not guaranteed to execute at or near the stop price but will become a market order once the stop price is reached.

Disadvantages of Stop Order

  1. A stop order is an order to buy or sell a security at a pre-specified price.
  2. The main disadvantage of a stop order is that it does not guarantee that your trade will be executed at your desired price.
  3. In fast-moving markets, the stop order may be executed at a price far away from your desired price, or it may not be executed at all.
  4. Another disadvantage is that stop orders are subject to market slippage, which means you may pay more (or receive less) than you had anticipated.

Key Differences Between a Limit Order and a Stop Order

  • You’re telling your broker to buy or sell shares at a specific price when you place a limit order.
  • On the other hand, a stop order is an order to buy or sell shares once the stock reaches a specific price.
  • If you have a limit order to buy shares of XYZ stock at $10 per share, your order will only be executed if the stock is trading at $10 or less. Your order will not be executed if the stock trades at $11. On the other hand, if you placed a stop order for XYZ at $10 and it reached that level, your order would then be executed, and you’d get your shares of XYZ.
  • The big difference between the two orders is that with a limit order, there’s no guarantee that it’ll ever get executed–if the stock never dips below $10 while it’s trading.

When Do I Use a Stop vs. a Limit?

When do you use a stop order, and when do you use a limit order? Both orders are placed with the expectation that the security will trade at or better than the order price, but they have different characteristics.

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A stop order becomes a market order once the security trades at or below the stop price, while a limit order becomes a market order once it trades at or above the limit price.

A stop order is buying or selling a security at the best available price once the security price reaches a specified stop price. A limit order is to buy or sell a security at a specified price or better. So, when do you use each?

Conclusion

A limit order is to buy or sell a security at a specified price or better. A stop order, also known as a stop-loss order, is an order to buy or sell a security at a specified price or worse. So, if you want to purchase shares of XYZ stock at $10 per share but are willing to wait and only buy if the price falls to $9 per share, you would place a limit order.