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This risk can be avoided by placing a stop-limit order, but that may prevent the order from being executed at all. 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. They also may never be executed if the limit price is not reached. The stop price and the limit price do not have to be the same.īrokers may charge a high commission fee for limit orders. Stop-limit orders allow the investor to control the price at which an order is executed. They can also be used to guarantee profits, by ensuring that a stock is sold before it falls below purchasing price. Limit orders guarantee a trade at a particular price. Here's an example that illustrates how the various trading options - market, limit, stop and stop-limit orders - work for buying and selling a stock priced at $30. Once the stop price is reached, the order will not be executed until the limit price is reached. A stop-limit order provides the option to set a stop price and a limit price. In a regular stop order, once the set price is reached, the order is executed at the market price. This would limit the downside by putting a ceiling on the price she pays to acquire the shares. Conversely, someone looking to buy the same stock may be waiting for the right opportunity (a price dip) but may want to place a stop order to buy at $58.
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A stop order is an instruction to trade shares if the price gets “worse” than a specific price, known as the stop price.For example, a stop order at $50 placed by the owner of a stock currently trading at $53 means Sell this stock at the market price if the stock price hits $50. The trade will only execute at the set price or better.Ī stop order, on the other hand, is used to limit losses. This frees the investor from monitoring prices and allows the investor to lock in profits. Limit orders are executed automatically as soon as there is an opportunity to trade at the limit price or better. So a limit order at $50 would be placed when the stock is trading at lower than $50, and the instruction to the broker is Sell this stock when the price reaches $50 or more. For someone wanting to sell, a limit order sets the floor price. The investor would place such a limit order at a time when the stock is trading above $50. For example, for an investor looking to buy a stock, a limit order at $50 means Buy this stock as soon as the price reaches $50 or lower. However, stop and limit orders can be placed for all kinds of securities, including options and futures.Ī limit order is an instruction to the broker to trade a certain number shares at a specific price or better. This comparison uses stocks in the definitions and examples because that is the most common scenario for individual investors. For sell orders, this means selling as soon as the price drops below the stop price. For buy orders, this means buying as soon as the price climbs above the stop price. For buy orders, this means buy at the limit price or lower, and for sell limit orders, it means sell at the limit price or higher.Ī stop order, sometimes called a stop-loss order, is used to limit losses it instructs the broker to execute a trade when a stock reaches a price beyond which the investor is unwilling to sustain losses. A limit order instructs the broker to trade a certain number of shares at a specific price or better. A limit order is used to try to take advantage of a certain target price and can be used for both buy and sell orders.
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These orders are instructions to execute trades when a stock price hits a certain level. Rather than continuously monitor the price of stocks or other securities, investors can place a limit order or a stop order with their broker. Diffen › Finance › Personal Finance › Investment