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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 tell 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.

A limit order is an order to buy or sell stock for a specific price. For example, if you wanted to purchase shares of a $100 stock at $100 or less, you can set a limit order that won't be filled unless the price you specified becomes available. However, you cannot set a plain limit order to buy a stock above the market price because a better price is already available.

Similarly, you can set a limit order to sell stock once a specific price is available. Imagine that you own stock worth $75 per share and you want to sell if the price gets to $80 per share. A limit order can be set at $80 that will only be filled at that price or better. You cannot set a limit order to sell below the current market price because there are better prices available.

Sometimes traders want to set an order to buy or sell stock once a future price has been met that wouldn't normally be allowed by using limit orders. For example, what if you want to sell stock you own if the price drops too far? Or what if you want to buy shares but only once the stock has started to rise. In these situations, a stop order can be used.

A stop order comes in a few different variations, but they are all considered conditional based on a price that is not yet available in the market when the order was originally placed. Once the future price is available, a stop order will be triggered, but depending on its type, the broker will execute them differently.

Stop-Limit Order

A stop-limit order consists of two prices: a stop price and a limit price. This order type can be used to activate a limit order to buy or sell a security once a specific trigger price or stop has been met. For example, imagine you purchase shares at $100 and expect the stock to rise. You could place a stop-limit order to sell the shares if your forecast was wrong. If you set the stop price at $90 and the limit price as $90.50, the order will be activated if the stock trades at $90 or worse. However, a limit order will be filled only if the limit price you selected is available in the market. If the stock drops overnight to $89 per share, that is below your stop price, so the order will be activated, but it will not be filled immediately because there are no buyers at your limit price of $90.50 per share. The stop price and the limit price can be the same with this order type.

Stop Market Order

A stop market order will turn into a traditional market order once your stop price is met or exceeded. In the previous example, the stop-limit order was not filled at $90.50 because that price was not available in the market when the stock dropped through the stop price overnight. A stop market order is triggered once the price is equal to or beyond $90 and in this example will be executed at $89 or the best alternative price. In these two scenarios, the stop order is used to control losses, and both orders are sometimes referred to as a "stop loss" by traders.

Both stop-limit and stop market orders can be used to enter a position as well. If a stock was trading at $100 per share and you felt more comfortable buying once there was a little more upward momentum, you could set a stop-limit or stop market order above the market price. If you set a stop-limit order with a stop price at $105, your order will be triggered once that price has been seen in the market, but it will be filled if the limit price you set is available.

A stop market order can be set as an entry order as well. If you wanted to open a position once the price of a stock is rising, a stop market order can be set above the current market price, which turns into a regular market order once your stop price has been met.

Stops Are Conditional Orders

The important thing to remember about stop orders versus limit orders is that a limit order can be seen by the market and a stop can't until it is triggered. If you want to buy an $80 stock at $79 per share, then your limit order can be seen by the market and filled when sellers are willing to meet that price. Stops are a two-part order and will only turn into an actual limit or market order that can be seen by the market once the stop price has been met or exceeded. The market or limit order is conditional on the stop price being triggered.

Many brokers now add the term "stop on quote" to their order types to make it clear that the stop will only be triggered once a valid quoted price in the market has been met. For example, if you set a stop market order with stop price of $100, it will be triggered only if a valid quote at $100 or better is met.

Stop Loss Example

A trader purchased Amazon.com, Inc. (AMZN) for $1,900 per share on Oct. 5, 2018. She is concerned that the price might fall and sets a stop limit order to sell the stock with a stop price at $1,750 and a limit price of $1,800 per share. As you can see in the following chart, the original purchase could have been filled on Oct. 5, and the stop price was triggered when the stock dropped to $1,750 on Oct. 11. However, the limit price of $1,800 wasn't available until the stock rose on Oct. 12.

Example of a stop-loss order

The trader in this example could have used a stop market order that was activated once the stock price hit $1,750 or less. If the investor had used a stop market order, it would have triggered on Oct. 11 and could have been filled right away at the open price at $1,724, which would have resulted in a deeper loss than with the stop-limit order.

Drawbacks of Stop Orders

A stop-limit order has two primary risks: no fills, or partial fills. It is possible for your stop price to be triggered and your limit price to remain unavailable. If you used a stop limit order as a stop loss to exit a long position once the stock started to drop, it may not close your trade.

Even if the limit price is available after a stop price has been triggered, your entire order may not be executed if there wasn't enough liquidity at that price. For example, if you wanted to sell 500 shares at a limit price of $75 but only 300 were filled, then you may suffer further losses on the remaining 200 shares.

A stop market order avoids the no fills or partial fills risks, but because it is a market order, you may have your order filled at a price much worse than what you were expecting. For example, imagine that you have set a stop market order at $70 on a stock that you bought for $75 per share. The company reports earnings after the market closes and opens the next day at $60 per share after disappointing investors. Your order will be activated, and you could be out of the trade at $60, far below your stop price of $70.

Stop vs. Limit Orders Summary

A limit order instructs your broker to fill your buy or sell order at a specific price or better. This is different than a market order that will be filled at the best price available in the market once it has been entered, which may be more or less than you were hoping for when you entered the order. A limit order is visible to the market so it cannot be set above the market price for buy orders or below the market price for sell orders since better prices are available at the time.

A stop order will activate a limit or market order once a stop price has been met. The stop order isn't visible to the market, so investors can set the price above the market if they wish to buy or below the market or if they wish to sell once their stop price has been hit. A stop order is a type of conditional order because an actual buy or sell order is conditional on the market price hitting the stop price.

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