Loading the player...
A:

Different types of orders allow you to be more specific about how you'd like your broker to fill your trades. When you place a stop or limit order, you are telling your broker that you don't want the market price (the current price at which a stock is trading), but that you want your order to be executed when the stock price moves in a certain direction.

With a stop order, your trade will be executed only when the security you want to buy or sell reaches a particular price (the stop price). Once the stock has reached this price, a stop order essentially becomes a market order and is filled. For instance, if you own shares of JC Penney (JCP), which currently trades at $5.60, and you place a stop order to sell it at $5.00, your order will only be filled if stock JCP drops below $5.00. Also known as a "stop-loss order", this strategy allows you to limit your losses. However, this type of order can also be used to guarantee profits. For example, assume that you bought stock JCP at $4.50 per share and now the stock is trading at $5.60 per share. Placing a stop order at $5.00 will guarantee profits of approximately $0.50 per share, depending on how quickly the market order can be filled.

Stop orders are particularly advantageous to investors who are unable to monitor their stocks for a period of time, and brokerages may even set these stop orders for no charge.

One disadvantage of the stop order is that the order is not guaranteed to be filled at the preferred price that the investor states. Once the stop order has been triggered, it turns into a market order, which is filled at the best possible price. This price may be lower than the price specified by the stop order. Moreover, investors must be conscientious about where they set a stop order. It may be unfavorable if it is activated by a short-term fluctuation in the stock's price. For example, if stock JCP is relatively volatile and fluctuates by 15% on a weekly basis, a stop loss set at 10% below the current price may result in the order being triggered at an inopportune or premature time.

A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. For instance, if you want to buy stock JCP, which is trading at $5.60, you can set a limit order for $5.50. This guarantees that you will pay no more than $5.50 to buy this stock. Once the stock reaches $5.50 or less, you will automatically buy a predetermined amount of shares. On the other hand, if you own JC Penney trading at $5.60, you could place a limit order to sell it at $6.10. This guarantees that the stock will be sold at $6.10 or more.

The primary advantage of a limit order is that it guarantees that the trade will be made at a particular price or better; however, your brokerage will probably charge a higher commission for the limit order, and it's possible that your order will not be executed at all if the limit price is not reached.

To learn more, see How does a stop-loss order work?, The Basics of Order Entry and The Stop-Loss Order - Make Sure You Use It.

RELATED FAQS
  1. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
  2. What is the difference between a stop and a market order?

    Learn about market orders and stop orders, how they are used and executed, and the main difference between stop orders and ... Read Answer >>
  3. How can I use a stop order to limit my losses on a long stock position?

    Learn about stop orders, different stop order types, and how to use stop-loss orders and stop-limit orders to limit losses ... Read Answer >>
  4. What types of investors are best-suited for stop loss orders?

    Use a stop-loss order to mitigate downside risk. Whether you are a conservative beginner or a seasoned day trader, a stop ... Read Answer >>
  5. How do I set a strike price in foreign exchange trading?

    Learn about the different order types foreign exchange traders can use to manage positions at certain strike prices and how ... Read Answer >>
  6. How do I place a limit order online?

    Learn how a limit order is placed, the types of stocks it is most useful for and the specifications placed with it to suit ... Read Answer >>
Related Articles
  1. Trading

    Protect Yourself From Market Loss

    There are several simple strategies you can use to protect yourself from downside risk.
  2. Trading

    How To Place Orders With A Forex Broker

    Learn how to set each type of stop and limit when trading currencies.
  3. Trading

    The Stop-Loss Order - Make Sure You Use It

    It's a simple but powerful tool to help you implement your stock-investment strategy. Find out how.
  4. Investing

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
  5. Trading

    Understanding Order Execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  6. Trading

    Trailing-Stop/Stop-Loss Combo Leads to Winning Trades

    Combine trailing stops with stop-loss orders to reduce risk and protect portfolio value.
RELATED TERMS
  1. Bracketed Buy Order

    A buy order that is accompanied by a sell limit order above the ...
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  3. Stop Order

    An order to buy or sell a security when its price surpasses a ...
  4. Buy Limit Order

    An order to purchase a security at or below a specified price. ...
  5. Away From The Market

    An expression that is used when the bid on a limit order is lower ...
  6. Stopped Order

    A market order on the NYSE that is stopped from being executed ...
Trading Center