It is simply impossible for any investor/trader to continuously monitor the prices of different financial instruments like stocks or currencies. That’s when a limit order or a stop order comes in very handy. These orders are instructions to execute trades when the price of a financial instrument hits a certain predefined level. They can be placed on all kinds of financial securities. However, it is important to know the difference between the two and to know when either of them can be used.
A limit order can be used for both buy and sell orders. They are used to take advantage of a certain target price. They are of two types:
- Sell order
It instructs the broker to trade a certain number of securities at a specified price or at a price higher than that.
2. Buy orders
In this case, the broker or the trader can buy securities at a limit price or a price lower than that.
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A stop order is also called a stop-loss order as it is used to limit losses. Stop order instructs the broker to execute a trade when the security reaches the predefined price beyond which the investor is unwilling to sustain losses. These are of two types as well.
- Buy orders
The broker has to execute a trade when the price climbs above the stop price.
2. Sell orders
This implies selling the securities as soon as the price drops below the stop price.
This explained what both the orders are all about, now it is important to know the difference between the two. It is as follows:
Limit Order V/s Stop Order
|Basis||Limit Order||Stop Order|
|Definition||Trade at a price equal to or better than a certain price.||Trade if the price moves beyond the desired target.|
|Instructions||For buy orders, buy at the predefined amount or lower.|
For sell orders, sell at the predefined amount or higher.
|For sell orders, sell if price falls below the predefined amount.|
For buy orders, buy if price climbs above the predefined amount.
|Advantage||Limit orders are used by the investors to lock in the price they want. Limit orders are guaranteed to be executed at a particular price or better.||The intention behind placing a stop order is to limit losses. If the securities’ price is moving in a direction opposite of what the investor would like, the stop order helps in mitigating potential losses.|
|Disadvantage||In order to use a limit order, a heavy amount of commission is to be paid to the brokers.||Trade price may be worse than the stop price as they can be triggered by short term fluctuations as well.|
These two can be very useful if the trader/investor can’t devote much time to the trading business. One will mitigate the number of losses that can be incurred; the other would try to get a better price than planned.
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