A buy limit order is used when an investor wants to open a long position in a stock at a certain price, while a stop order is used by an investor who wants to lock in profits or limit losses by exiting a position. A stop order is also known as a stop loss order if it is being used to limit the amount of losses on a stock trade. A stop order can be used to exit a long or short position in a security. It does not only apply to long positions.
Buy limit orders are not guaranteed to fill. If the stock never falls to the limit price, the order is not filled. Further, many investors place time limits on how long the limit order is in effect. Limit orders can cancel automatically if not filled during a set time.
Stop orders can be used by investors in a number of ways. A stop order may be of benefit to an investor who is unable to monitor a stock position closely. A stop order may also take some of the emotion out of trading by allowing the investor to exit or enter a position automatically, once a stock reaches a certain price.
A stop order can also be referred to as a stop-loss order, which is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order then becomes a market order. This is an important distinction since, once triggered, market orders can execute either close to the stop price, or possibly significantly below or above the strike price, especially when trading in extremely volatile market conditions.
In the case of a stop loss order, once it becomes a market order, it can result in a substantially worse fill. A gap occurs on a stock chart where there is a space between bars in the price, during which time no shares traded. It's common for a stock to gap above or below the prior day’s close. Therefore, investors need to understand the risk associated with different order types.
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