Do I place stop or limit order on a stock?
I purchased a stock at $1. It's trading at $1.80. I want to make sure I sell it if it goes down to $1.30. Do I place stop or limit order?
You can do that, but low price stocks often trade on thin volumes. If that is the case, you need to be very careful. You don't want to automatically sell shares just because some dope put a large block up for sale at the market price and drove the price down sharply on a temporary basis. You can put a stop limit that will put a floor under the price as well, so that it wouldn't execute below a certain level. So pay attention to liquidity and volatility in these small stocks. Call your broker's trading desk if you are unsure what to do.
You would place a Stop order at a pre-determined price. Once this price is hit, then the order is turned into a market order. You must be careful, especially with thinly traded penny stocks with low volume. This is because they are fast moving. If you put in a stop at $1.30, when a trade hits $1.30, your order would be turned into a market order. The problem is your trade could be executed at $1.15 or even $1.00 (or lower) if it is fast moving. Essentially, you could "gap down" below your price.
A limit order specifies the limit you are willing to accept, but it may not get filled. So if you put in a "stop limit" at $1.30, it could trigger to sell at $1.30, but the next trade could continue below that and keep going down and you will not get filled at your limit of $1.30.
My recommendation to give yourself some "breathing room" is to put is a Stop order at, say $1.40 or $1.45 so you have a .10 to .15 cent buffer when triggered to set to a market order. Then if the stock is still going lower, you will likely (but no guarantee) be filled around or above $1.30.
The problem with penny stocks is that their bid-ask spread can be wide so it is harder to control stop loss and limit orders.
Hope this helps and best of luck, Dan Stewart CFA®