Limit Order vs. Stop Order
Limit OrderA limit order can be used to both buy a share you are interested in or to sell shares you currently have based on certain pricing parameters you establish.
With limit orders you are essentially setting prices where you want to take advantage of a good price to either buy shares or sell shares. Once you enter a limit order as soon as the price you've specified has been met it will become a market order with the brokerage and they will carry out the transaction. When placing a limit order you often need to specify an expiry date for your order and if the price target you've established hasn't been hit before then the order will be removed.
Stop OrderA stop order, also often referred to as a stop-loss order, is a similar mechanism where you place an order to either buy or sell shares based on a set price. The difference from a limit order is that in both situations a stop order refers to a situation where you want to limit the loss you will incur in a certain transaction.
In a selling situation, where you already hold the share, a stop order is instructing the broker to sell the share at the stop price or lower. In this way you care minimizing your loss on the sale of the share, as opposed to a limit order where you are setting a higher price where you want to lock in your profit. In a buying situation a stop order is used when you are certain you want to buy a share but you haven't bought yet and want to limit any loss you face in buying should the price go up. As such when you enter a buy order your broker will buy the share at the stop price or higher.
Similar to a limit order once you have entered your stop order with your broker and the target price has been met a market order will be placed. Also with a limit order you typically enter an expiry date on your order after which it will be deleted from the system.
Limit Order vs. Stop OrderWhen entering a limit order or a stop order it is very important that you understand the distinction, because a buy order at your set price or higher vs. your set price or lower will trigger very different market orders. Confusing the two can quickly result in your making an order that is completely the opposite of what you were intending to do.
Limit orders and stop orders are common features with most online brokerages and while stop orders are typically free limit orders can come with a fee attached so it is important to review the specific details your broker offers. Once you are comfortable using stop orders and limit orders they can be very useful tools to make orders on terms you're comfortable with even when you're not there to physically make the order yourself.
By Jeffrey Glen