What is the difference between limit and stop loss

Be aware that if you enter these orders on the unintended side of the market, you could be filled immediately at the current market price. Consider for example a buy stop order.

Buy stop orders should be entered above the current market price. When the market trades up to or through the stop price, a market order is sent. If an account holder were to incorrectly enter a buy stop order below the current market price, the system would correctly note that the market had already traded through the stop price, and a market order would be instantly sent.

Order Types. Market orders : Buy and sell shares as soon as possible. Limit orders : Give you control over the price you buy and sell shares for. Stop-loss and stop-buy orders: Act as almost an insurance policy.

Auto-investing : Set-and-forget your investments. Limit orders give you control over the price you buy and sell shares for, and are usually used to try to get a better deal than the current market price.

A limit buy order allows you to specify the exact price you want to buy shares for. Usually the price you want to pay is BELOW the current market price because you want to buy low , but it can be a few percent higher than the current market price if you just want certainty over the price see the rules here. This can saddle the investor with a substantial loss in a fast market if the order does not get filled before the market price drops through the limit price.

Both types of orders can be entered as either day or good-until-canceled GTC orders. Choosing which type of order to use essentially boils down to deciding which type of risk is better to take. The first step to using either type of order correctly is to carefully assess how the stock is trading.

If the stock is volatile with substantial price movement, then a stop-limit order may be more effective because of its price guarantee. If the trade doesn't execute, then the investor may only have to wait a short time for the price to rise again. A stop-loss order would be appropriate if, for example, bad news comes out about a company that casts doubt upon its long-term future.

In this case, the stock price may not return to its current level for months or years if it ever does. Investors would, therefore, be wise to cut their losses and take the market price on the sale.

A stop-limit order may yield a considerably larger loss if it does not execute. Another important factor to consider when placing either type of order is where to set the stop and limit prices. Technical analysis can be a useful tool here; stop-loss prices are often placed at levels of technical support or resistance. Investors who place stop-loss orders on stocks that are steadily climbing should take care to give the stock a little room to fall back.

If they set their stop price too close to the current market price, they may get stopped out due to a relatively small retracement in price. They may also miss out when the price starts to rise again.

Stop-loss and stop-limit orders can provide different types of protection for both long and short investors. Stop-loss orders guarantee execution, while stop-limit orders guarantee the price. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. 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. Brokers may charge a high commission fee for limit orders. 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. They can also be activated by short-term market fluctuations. Share this comparison:. If you read this far, you should follow us:. Diffen LLC, n.