The stop order is one of the most basic trades in stock trading, along with the limit and the market exchanges. Also called the stop-loss order, it buys rising stock and sells stock that falls, essentially cutting loss by buying before a security’s value rises too high, and selling before the price drops too low. The stop-limit order does the same, but it limits what is too high in a buy, and what is too low for a sale. Following is some information about the difference between stop and stop-limit orders.
Stop Order in Investing
Traders at discount brokerages like Robinhood, E-Trade, and TD Ameritrade should know three fundamental orders before trading stock: the market, the limit, and the stop. The stop order has a function which allows a certain price to trigger a buy or sell. For instance, if a security is trading at $4 per share, and investor could set a buy stop trade to purchase shares at $4.50, in case the stock should show upward momentum. When the value hits the stop price, a market order is triggered, and shares are purchased at the next price, which could be very different if the stock gaps.
In a sell, for a stock trading at $3, the investor could set a sell stop-loss exchange with a stop price at $2.50, and if the value should drop to that price, the market order would be enacted.
Stop-Limit Order in Stock Trading
The stop-limit order is the same as the stop trade except it allows a limit price to be set to allow for what is considered too much spending on a buy and too little return on a sell. Referring again to the above scenarios, an investor could set a stop-limit order to buy a stock that trades at $4 with a stop price at $4.50 and a limit price at $4.75. This way, the buy will fill if shares may be taken on once the stop price has been hit (at $4.50) only if the limit has not been exceeded, and shares can be bought at or under $4.75.
In the sell above, on a stock trading at $3, the investor could set a stop price at $2.50, and a limit price at $2.25. The sale will only complete if shares can be unloaded at $2.25 or more per share once $2.50 has been hit.
Difference Between Stop and Stop-Limit Order for Stock
The stop-limit order is the same as the standard stop-loss trade except it allows more precision, which prevents overspending and underselling. If, in the first scenario above, a standard stop trade to buy at $4.50 is set on a security trading at $4, the price hits the stop and then the value quickly jumps to $5.50, shares will be bought, but the stop-limit order will limit overspending with the limit component. With a limit price at $4.75, a stock that gaps up significantly after hitting the stop price will not be purchased. In a sell, it protects from taking too little for shares unloaded.
The stop-limit trade prevents a high buy, because the investor sets the upper limit of how much he or she is willing to spend. In a sell, it prevents selling too low, as the investor has hope that the stock will at some point rise above the limit price in its future, and it may eventually be sold for more than the very little that may be earned when a stock gaps down. This more complex trade essentially calls off the exchange when the limit is exceeded, acting on behalf of the trader who has hopes that later on, the stock will reach a more favorable price at which a trade may be filled.
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