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What’s the Difference Between a Stop Order and a Limit Order?

What’s the Difference Between a Stop Order and a Limit Order?

When you’re engaged in stock trading, it’s often difficult to constantly monitor the prices of the stocks on your own. As a result, most brokerages allow investors to place conditional instructions like stop orders and limit orders with them to make certain trades when the desired price has been achieved. 

To ensure that what you want happens in the future, investors will need to have a clear understanding of the two. Keep reading and find out why.

What is a stop-loss order?

A stop order or a stop-loss order is an order you can place to either buy or sell shares at a set price. The main purpose of a stop order is to limit the loss that can be incurred in a certain transaction. 

If you already hold the share and you’re selling it, a stop order will instruct the broker to sell at the stop price or lower. As a result, you can limit the loss on the sale of the share, unlike limit orders where you where you want to sell at a higher price. 

What is a limit order?

A limit order can be used in both situations where you buy or sell shares. These decisions are made based on certain established pricing parameters. When you place a limit order, you instruct the broker to trade specified shares at a price you have already specified or higher. 

In a buying situation, the investor instructs the broker to buy at the limit price or lower. This means that this approach enables investors to set prices that they want to take advantage of when they buy or sell shares. 

So whenever the specified price has been met, it will become a market order for the broker to conduct the transaction. Like a stop order, a limit order can come with an expiry date. So if the preset target hasn’t been met over a specified period of time, the order will be removed. 

If you’re entering a stop order or limit order, you have to know the difference as they can trigger very different market orders. So it’s critical that you don’t confuse the two as you will quickly get results that are the opposite of what you intended.

Both are common features of online brokerages that often charge fees for such instructions. But it’s a great and important tool as not all investors can be present around the clock to monitor all their investments.