Stop-Loss, Stop-Limit and Limit Order
First Published date: 28. September, 2022Last Updated: 23. November, 2022Fact-checked by Adrian Müller
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What is a Stop-Loss Order?
A stop-loss order is an order placed with a broker to buy or sell a security when it reaches a certain price. The investor sets the stop-loss price at a level below the current market price so that if the stock falls to that level, the order will be executed automatically. This type of order is used to limit losses in a security position.
How Stop-Loss Orders Work
The way a stop-loss order works is simple. Let’s say you own shares of XYZ stock, which is currently trading at $50 per share. You’re worried that the stock might fall so you place a stop-loss order at $45 per share. If the stock falls to $45, your stop-loss order will be triggered and your shares will be sold at the market price, which could be lower than $45.
What is a Stop-Limit Order?
A stop-limit order is an order to buy or sell a security at a specified price, known as the “stop price,” after the security reaches a certain threshold, known as the “limit.” Once the stop price is reached, the limit order becomes active and will be filled at that price or better. Stop-limit orders are often used by investors who want to control their risk or limit their losses.How Stop-Limit Orders Work
There are two types of stop-limit orders: buy stop-limits and sell stop-limits. A buy-stop-limit order is placed above the current market price, and a sell-stop-limit order is placed below the current market price. For instance, if you wanted to buy shares of ABC Corporation at $25 per share, but you didn’t want to pay more than $26 per share, you would place a stop-limit order with a stop price of $25 and a limit price of $26.If the stock price of ABC Corporation reaches $25, your order will become a limit order to buy shares of ABC Corporation at $26 or less. If the stock price of ABC Corporation never reaches $25, your order will never be executed.
Stop-limit orders are not guaranteed to be executed. They may be partially filled, or they may not be filled at all. Stop-limit orders are subject to the same “gapping” risks as other limit orders. “Gapping” occurs when the market price of a security moves sharply up or down, without trading at the intervening prices. This may cause a stop-limit order to be executed at a price that is significantly different from the stop price.
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77% of retail CFD accounts lose money
Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.
Plus500 is a trusted global brand that offers an easy-to-use trading platform for online traders, alongside access to share trading, crypto and a thorough selection of CFDs.
What is a Limit Order?
A limit order is an order to buy or sell a security at a specified price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Limit orders are not guaranteed to be executed.When you place a limit order, you are telling your broker that you are willing to buy or sell a security at a certain price. Your order will only be executed if the security trades at or below your limit price for a buy order, or at or above your limit price for a sell order.
You may also use a limit order to protect profits by setting a sell limit order at a price above the current market price or to prevent losses by setting a buy limit order at a price below the current market price.
Limit orders are not always necessary, but they can be helpful if you want to control the price you pay for a security. When placing a limit order, be sure to check the current market price of the security to ensure that your order is likely to be executed.
How Limit Orders Work
Limit orders give you more control over the price you pay for a security, but they don’t guarantee that your order will be filled. If the market is moving quickly and there aren’t any buyers or sellers at your limited price, then your order may not be filled.You may also use a limit order to protect profits by setting a sell limit order at a price above the current market price or to prevent losses by setting a buy limit order at a price below the current market price.
When you place a limit order, you’re telling the market maker that you’re willing to buy or sell at a certain price. The market maker will then try to find someone on the other side of the trade who is also willing to buy or sell at that price. If they can’t find a match, your order may not be filled.
Limit orders can be a helpful tool in managing your trades. But it’s important to remember that they’re not guaranteed and there’s always a chance your order won’t be filled.
Comparing Stop-Loss, Stop-Limit, and Limit Orders
When it comes to setting up trades, there are a few different options available to you in terms of order types. In this article, we’re going to take a look at three of the most common order types: stop-loss, stop-limit, and limit orders.Each of these orders has its benefits and drawbacks, so it’s important to understand how each one works before making a decision on which one to use.
- Stop-loss orders are designed to limit your losses in a trade. If the price of the security you’re trading moves against you and reaches the stop-loss price, your order will be executed and you will sell your position.
- Stop-limit orders are similar to stop-loss orders, but with one key difference. With a stop-limit order, you specify a price at which you want your trade to be executed. If the price of the security reaches that level, your order will be filled at the specified price or better.
- Limit orders are used when you want to buy or sell a security at a specific price. If the security you’re trading reaches the limit price, your order will be executed.
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Real-life examples of when to use Stop-Loss, Stop-Limit, and Limit Order
When you’re buying stocks, there are three main types of orders you can use to enter or exit a trade: stop-loss, stop-limit, and limit. Here’s a quick rundown of each one and what situations they’re best suited for.- A stop-loss order is an order to sell a security when it reaches a certain price, designed to help limit an investor’s loss on a position. For example, let’s say you buy shares of XYZ Company at $50 per share. You might place a stop-loss order at $45, which would automatically sell your shares if the stock falls to that level.
- A stop-limit order is similar to a stop-loss, but with one key difference: after the security reaches the stop price, the order becomes a limit order, which will only be executed at or better than the limit price you set. So in our XYZ Company example, let’s say you place a stop-limit order with a stop price of $45 and a limit price of $46. If the stock falls to $45, your order will turn into a limit order and can only be executed at $46 or higher.
- Finally, a limit order is an order to buy or sell a security at a specific price or better. A buy limit order can only be executed at the limit price or lower, while a sell limit order can only be executed at the limit price or higher. Limit orders are not triggered by price movements like stop-loss and stop-limit orders, but rather only fill when the security reaches the specified limit price.
Advantages and Disadvantages
Now that we understand the difference between stop-loss, stop-limit, and limit orders, let’s discuss the advantages and disadvantages of each type of order.
Advantages of Stop Loss Orders: A stop-loss order protects your assets by automatically selling them once they reach a certain price. This type of order ensures that you don’t lose more than you’re willing to risk. Thus, the main advantage of a stop-loss order is that it limits your downside.
By protecting your downside, stop-loss orders also allow you to sleep at night without worrying about your investments. Stop loss orders are helpful for traders who are high in optimistic greed. Sometimes a stock might keep falling and an investor’s denial might cause him to hold on for too long, leading to even greater losses. In these cases, a stop-loss order would limit the damage by automatically selling the shares at a predetermined price.
Disadvantages of Stop Loss Orders: If the market is very volatile, your stop-loss order might be executed at a price much lower than you anticipated. There is also the risk that your broker might not be able to execute your stop-loss order at the desired price if there’s a sudden influx of sell orders in the market.
Short-term volatility can also cause a sell order to be triggered prematurely. For example, Amazon stock was a rollercoaster ride in terms of price during its rise to corporate power. If the stop loss order was triggered, you would have missed out on massive long-term gains.
Advantages of Stop Limit Orders: When it comes to the advantages of stop limit orders, there are a few key points to consider.
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First and foremost, stop limit orders help to limit your losses in the event that a stock price falls sharply. Secondly, stop limit orders can help you to lock in profits by automatically selling your shares once the stock reaches a certain price. Finally, stop limit orders can help to take the emotion out of trading by automatically executing your trade at a predetermined price.
Disadvantages of Stop Limit Orders: While stop limit orders offer several advantages, there are also a few potential disadvantages to consider.
First, if a stock price falls sharply and then rebounds quickly, you may miss out on some of the upsides if your stop limit order is triggered. Secondly, stop limit orders can be subject to slippage, which means that your order may not be executed at the exact price you had specified. Finally, stop-limit orders can sometimes be difficult to execute during periods of high market volatility.
Advantages of Limit Orders: Limit orders have the advantage of preventing an investor from buying overvalued stocks. It also helps ensure that an undervalued stock is bought while the opportunity lasts. By setting a limit order with a specific desired price per share, an investor is guaranteed to buy or sell the stock at that price or better. limit orders provide certainty about the price of a trade and can save an investor money.
If an investor has researched a company and has determined that it is an excellent firm with positive forward potential, but the shares are trading at a high value compared to the intrinsic value, a limit order can be used to buy the shares when they dip to the intrinsic value. This can be a helpful tool for value investors because it allows them to buy stocks that they believe are undervalued without having to constantly monitor the market.
Disadvantages of Limit Orders: Limit orders can be disadvantageous if the market price of stock never reaches the limit price. In this case, the limit order will not be executed and the investor will miss out on potential gains. If a limit order is placed with a broker that charges a commission, the investor may also end up paying more in fees than if they had just bought or sold the stock at the market price.
Limit orders can also be disadvantageous if an investor is trying to buy or sell a large number of shares and the limit order is only partially filled. In this case, the investor may have to pay more in commissions than if they had just bought or sold the shares at the market price.
In growth stocks, its stock price can seem overvalued for years and even decades, and limited orders will prevent someone from entering into a position that can disrupt their portfolio. For investors that don’t care about the specific value of a stock but see a potential that goes beyond the balance sheet, limit orders can be a hindrance.
It can also be mentally demanding to both pick stocks and pick the price to match their intrinsic value. Although this can help skilled investors, limit orders may not be suitable for everyone. For casual investors, limit orders can be a source of unnecessary stress.
Do I really need any of the Stop-Loss, Stop-Limit, and Limit Orders?
Yes and no. It truly depends on your trading strategy, how much of an active trader you are, and your risk tolerance.
If you day trade or swing trade stocks actively, limit orders will likely become your best friend because they limit your downside risk while still allowing you to capture profits on the upside.
Stop-loss orders can also be beneficial for investors who want to limit their downside risk but don’t want to have to constantly monitor their positions. For example, if you’re buying a stock that you believe is undervalued but has been volatile recently, you may want to place a stop-loss order at a price that’s below the current market price but above the level at which you believe the stock is truly undervalued. That way, if the stock falls sharply, you’ll limit your losses, but if it continues to trade sideways or move higher, you’ll still be able to profit from the move.
If however, you’re a buy-and-hold investor or you trade infrequently, stop losses, stop limit, and limit orders may not be necessary. In fact, they may even be more of a hindrance than a help. By reviewing the disadvantages and advantages of each tool of the trade and having awareness of your own trading style, risk tolerance, and goals as an investor, you can decide on whether limit orders, stop limit orders, or stop-loss orders are right for you and your portfolio.
Our best tips to get you started
If you decide that these tools of the trade would be helpful for your trading kit, it’s important to understand that limit orders, stop limit orders, and stop-loss orders each have their own quirks that you should be aware of before placing your first order. Before you get started, make sure you review these tips to ensure that you are using these tools correctly.
Check the fees associated with limit orders, stop limit orders, and stop-loss orders before placing your trade. As mentioned earlier, these types of orders may incur a fee from your broker. If so, these fees should be included in your calculations of whether or not the trade is worth placing.
Make sure you understand the difference between a limit order and a stop limit order. Knowledge is key when it comes to trading, and this is especially true when you are using special order types.
You would also want to make sure you have enough funds in your account to cover any limit or stop-limit orders. If you are not well capitalized to take advantage of these opportunities, your limited orders may not execute and you will miss out on great buying prices.
Don’t set sell orders if you don’t need the money and the company is on a long-term hold and is expected to have periods of volatility. This will cause selling to loss due to market uncertainty and reduce your position in a potentially great company.
Key takeaways
To summarize, limit orders, stop-loss orders, and stop-limit orders are all helpful order types that can help you have more control over your investments. By setting these orders, you don’t have to monitor or worry about missing a buying or selling opportunity. You can also protect yourself from substantial losses.
By knowing what asset you want and what price you are willing to write off or invest in, you can capitalize better on market opportunities.
For casual investors that are dollar cost averaging into the same asset over the long-term, these tools may not be necessary. However, for investors that are looking to take advantage of quick market movements or limit downside risk, limit orders, stop limit orders, and stop-loss orders may be the right tool for the job.
Use limit orders, stop limit orders, and stop-loss orders correctly by taking into account the tips mentioned in this article.
Of course, these tools alone won’t make you the best trader to ever walk down Wall Street, but you can rest assured that the best traders know how to use these tools to their advantage. By educating yourself on both the company, market sentiments, and trading capabilities of your brokerage account, you can better position your portfolio for optimal gains.
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