Limit Order vs. Stop Order: What's the Difference?
Edited by Harlon Moss || By Janet White || Published on October 26, 2024
A limit order specifies the maximum or minimum price to buy or sell, while a stop order triggers a buy or sell at the next available price after reaching a specified price.
Key Differences
A limit order is used by traders to specify the exact price at which they are willing to buy or sell a stock, ensuring that they do not pay more or receive less than this specified price. On the other hand, a stop order, also known as a stop-loss order, is designed to limit an investor’s loss on a position in a security by buying or selling once its price moves past a specified point, turning into a market order.
Limit orders give investors precise control over the price at which a trade is executed, stop orders are used to trigger an automatic sell or buy action at a specified price point, which can help protect against significant losses or lock in profits. Unlike limit orders, which may never be executed if the market price does not meet the investor's specified conditions, stop orders are executed at the next available price after the stop level is reached, which can vary significantly from the stop price in fast-moving markets.
Limit orders are ideal for investors who prioritize price over execution, as there's no guarantee the order will be executed if the market does not reach the specified price. Conversely, stop orders are suited for those looking to mitigate risk, as it guarantees execution but not price. This can be particularly important in volatile markets where prices can change rapidly.
One key difference in the application of these orders is their strategic use. Limit orders can be used to enter a new position or to exit an existing one at a favorable price, while stop orders are primarily used to limit loss or protect profits on existing positions. This distinction highlights the tactical considerations investors must make when choosing between these two types of orders.
Both limit and stop orders are essential tools in the investor’s arsenal, each serving different strategic purposes. Limit orders focus on price control, while stop orders concentrate on limiting potential losses or locking in profits, with both playing crucial roles in managing investment risks and strategies.
ADVERTISEMENT
Comparison Chart
Definition
An order to buy or sell a stock at a specific price or better.
An order that becomes executable once a set price is reached and then becomes a market order.
Purpose
To guarantee the price of a trade, not execution.
To limit loss or protect profits by triggering a sell or buy.
Execution Price
Specified by the trader.
Not guaranteed, executed at next available price after activation.
Execution Guarantee
No guarantee, depends on market reaching specified price.
Guaranteed once activated, but at potentially unpredictable prices.
Use Case
Ideal for price-sensitive entries and exits.
Used to stop losses or lock in profits automatically.
ADVERTISEMENT
Limit Order and Stop Order Definitions
Limit Order
An order to buy or sell a stock at a specified price.
I placed a limit order to buy shares at $50, ensuring I don't pay more.
Stop Order
Helps manage risk by setting a sell trigger.
My stop order protects me from bigger losses in a falling market.
Limit Order
Ensures price certainty but not execution.
My limit order to sell at $55 might not execute if the stock never reaches that price.
Stop Order
Can be used to enter or exit positions.
A stop order got me into the stock once it showed upward momentum by reaching a certain price.
Limit Order
Useful in less volatile markets.
In a stable market, my limit order helps me buy at the price I want.
Stop Order
Offers protection but no price guarantee.
The stop order ensured my sell, but the execution price was unpredictable.
Limit Order
Can prevent overpaying or underselling.
Using a limit order secures the price I'm comfortable trading at.
Stop Order
Effective in fast-moving markets.
In volatile trading, my stop order acted quickly to execute the trade.
Limit Order
Offers control over trading prices.
I set a limit order to control exactly at what price my trade happens.
Stop Order
Activates at a specified price and turns into a market order.
I placed a stop order to sell if the stock drops to $45, to limit losses.
FAQs
What is a limit order?
A directive to execute a trade at a specified price or better.
What is a stop order?
An order that triggers a market order once a specific price is reached.
When should I use a limit order?
When you want to specify the maximum or minimum price at which you're willing to buy or sell.
Is there a risk of a limit order not being executed?
Yes, if the market price never reaches the limit order's specified price.
What happens if a stop order’s price is reached?
It becomes a market order and executes at the next available price.
Are limit orders free to place?
Brokerages might have different policies, but there may be fees associated with executed trades.
Can a limit order be executed at a better price?
Yes, it can be executed at the specified price or a better one.
Do stop orders guarantee a specific execution price?
No, they guarantee execution but not a specific price.
When is a stop order useful?
To limit potential losses or to protect profits by automatically triggering a trade at a certain price.
Can a stop order prevent all losses?
No, but it can help minimize them by selling before further declines.
What's the difference in fees for limit vs. stop orders?
Fees depend on the brokerage, but the type of order may not significantly affect the cost.
How quickly are stop orders executed?
Once triggered, they are executed at market speed, which can be almost instant.
Can I cancel a limit order?
Yes, if it has not been executed yet.
Do stop orders work after hours?
Typically, no. They are active during market hours unless specified as GTC (Good Till Cancelled).
How do I choose between a limit order and a stop order?
Consider whether price certainty (limit order) or execution certainty (stop order) is more important for your strategy.
Can stop orders be placed for buying?
Yes, known as a "stop-buy" order, to purchase a stock once it reaches a higher price, indicating upward momentum.
Can I set a limit order to sell above the current market price?
Yes, to lock in profits if you anticipate the stock will rise.
Do professionals prefer limit or stop orders?
It depends on their trading strategy, risk tolerance, and the specific situation.
Can limit orders be placed on any stock?
Yes, but execution depends on market conditions and the stock's liquidity.
Are limit orders visible to the market?
Yes, but whether they influence the market depends on the order size and stock liquidity.
About Author
Written by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
Edited by
Harlon MossHarlon is a seasoned quality moderator and accomplished content writer for Difference Wiki. An alumnus of the prestigious University of California, he earned his degree in Computer Science. Leveraging his academic background, Harlon brings a meticulous and informed perspective to his work, ensuring content accuracy and excellence.
