Limit order and stop order are two of the instructions an investor can give to a broker to indicate an acceptable price to buy or sell a stock or other asset. They are alternatives to buying or selling at the current market price.
When you place a limit order or stop order, you inform the broker platform you are trading on that you do not want to buy or sell at the current market price. Instead, you want your order to be executed when the stock price matches the price you specified. There are differences between limit and stop orders. The limit order specifies the lowest acceptable price for the transaction to occur. The stop order triggers an actual order when traded at the specified price. On the other hand, a limit order is visible to the market while a stop order is not visible until it is triggered.
A limit order is an order to buy or sell a specific security at a specific price. You cannot simply set a limit order to buy a stock above the market price because a better price is already available. So, if you want to buy shares of a $100 stock for $100 or less, you can set a limit order that will not be filled unless the price you specify is available.
Similarly, you can set a limit order to sell stock when a certain price is available. Imagine you own stock at $75 per share and want to sell it if the price reaches $80 per share. The limit order can be set at $80 and will only be executed at that price or better. Note that you cannot set a limit order to sell below the current market price as better prices are available.
There are several different types of stop orders; but all of these are conditional, based on a price that is not available in the market at the time the order is placed. The stop order will be triggered when the future price becomes available.
The way the transaction is executed depends on the type of stop order. Many brokers now include the term ?stop on bid? in their order types to make it clear that the stop order will only be triggered when a valid bid price is met in the market. For example, if you set a stop order with a stop price of $100, this order will only be triggered when a valid bid of $100 or better is met. A regular stop order will turn into a traditional market order when your stop price is reached or exceeded. A stop order can also be set as an entry order. If you want to open a position when the price of a stock is rising, a market stop order can be set above the current market price. This becomes a regular market order once your stop price is met.
The limit order determines the maximum price you are willing to pay or the minimum price you are willing to accept in a sale. When an asset reaches a certain price, the stop order is triggered and executed at the next available price.
A stop-limit order has the characteristics of both a limit and a stop order. It consists of two prices: stop price and limit price. A stop-limit order can activate a limit order to buy or sell a security when a certain stop price is reached.
For example, let's say you purchased stock at $100 per share and expect the stock to rise. If your prediction is wrong, you can place a stop-limit order to sell the shares: If you set the stop price at $90 and the limit price at $90.50, the order will be activated if the stock trades at $90 or worse. However, the limit order will only be executed if the limit price you selected is available in the market. If the stock falls to $89 per share overnight (below your stop price), the order will be activated but will not be executed immediately because there are no buyers at your limit price of $90.50 per share. In this order scenario, the stop price and limit price may be the same.
A stop-limit order allows you to trigger an order at a specific stop price and then execute the transaction only if it can be completed at a specific limit price.
