A:

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 a position automatically at a certain price. Investors should be aware that a stop order is not guaranteed to fill. The stock can gap above or below the stop order and not trigger the order at the limit price.

A stop loss order is different, as it becomes a market order once the price goes below the price set. Thus, a stock that gaps below a limit sell stop then automatically becomes a market order. This 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. Investors need to understand the risk they are taking with different order types.

RELATED FAQS
  1. How does a stop order and a stop limit order differ?

    Traders use stop orders and stop limit orders as stop losses and regular investors should understand how each type works. Read Answer >>
  2. What's the difference between a stop and a limit order?

    A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. With ... Read Answer >>
  3. What is the difference between a buy limit and a sell stop order?

    Understand the differences between the two order types, a buy limit order and a sell stop order, and the purposes each one ... Read Answer >>
  4. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  5. How can I prevent my limit order from not getting filled if the stock's price gaps ...

    You can minimize the chances of this situation happening if you understand two types of orders: the buy-stop order and the ... Read Answer >>
Related Articles
  1. Investing

    Understanding Buy Stop Orders

    A buy stop order is an order to buy a stock at a specific price above its current market price.
  2. Trading

    Use Stops To Protect Yourself From Market Loss

    Master these simple risk management strategies to protect your portfolio or trading account from large losses.
  3. Trading

    Trailing-stop/stop-loss combo leads to winning trades

    Combine trailing stops with stop-loss orders to reduce risk and protect profits.
  4. Trading

    Why limit orders may cost more than market orders

    Learn the difference between a market order and a limit order, and why a trader placing a limit order sometimes pays higher fees than a trader placing a market order.
  5. Investing

    The Truth About Investing Using Stop Losses

    Stop losses are supposed to save you money when a stock's value falls, but they end up costing more.
  6. Trading

    Stop-Loss or Stop-Limit Order: Which Order to Use?

    While both can provide protection for traders, stop-loss orders guarantee execution, while stop-limit orders guarantee price.
RELATED TERMS
  1. Box-Top Order

    A box-top order is an order to buy or sell the best market price. ...
  2. End of Day Order

    An end of day order is a buy or sell order requested by an investor ...
  3. Order

    An order is an investor's instructions to a broker or brokerage ...
  4. Day Order

    A day order automatically expires if not executed on the day ...
  5. Firm Order

    A firm order may be referred to as an order for a trade from ...
  6. Protective Stop

    A protective stop is a strategy designed to protect existing ...
Trading Center