Buy Limit vs. Sell Stop Order: An Overview

Advanced traders typically use trade order entries beyond just the basic buy and sell market order. Simple buy and sell orders at the market price will usually ensure your trade occurs but it may also include slippage which is the amount you give up to market supply and demand directions when making a basic buy or sell market order. In general market orders are the simplest and most commonly available orders through a brokerage system, executing immediately at the market price.

Brokerage systems also provide for advanced order types that allow a trader to specify prices for buying or selling in the market. These advanced orders can eliminate slippage and ensure that a trade executes at an exact price if and when the market reaches that price during the time specified. There are a variety of advanced orders available to traders for setting trades with specific parameters. Each brokerage trading platform will have its own offering of trade order options so it is important to understand the options available in each system.

Five of the most common trading order options in a brokerage system include: market, limit, stop, stop limit, and trailing stop. Here we will discuss a limit order to buy and a stop order to sell.

Buy Limit Order

Both buy and sell limit orders allow a trader to specify their own price rather than taking the market price at the time the order is placed. Using a limit order for a buy allows a trader to specify the exact price that they want buy shares at. This price is typically a calculated entry point.

A limit buy order comes with a few important considerations. With a limit buy order, the brokerage platform will buy the stock at the specified price or a lower price if it arises in the market. A limit order is not guaranteed to be executed. It will not execute if the market never reaches the price level specified. Because limit orders can take longer to execute, the trader may want to consider designating a longer timeframe for leaving the order open. Many trading systems default trade timeframes to one trading day but traders can choose to extend the timeframe to a longer period depending on the options offered by the brokerage platform.

Limit buy orders can be used in any instance where a trader seeks to buy stock at a specified price. Using margin, a trader would still simply place a limit buy order for the price in which he seeks to buy.

Sell Stop Order

A sell stop order is a stop order used when selling. A stop order is much different than a limit order. A stop order in general includes a stop price that then triggers the allowance of a market order.

Sell stop orders have a specified stop price. In the case of a stop sell order, a trader would specify a stop price to sell. If the stock’s market price moves to the stop price then a market order to sell is triggered. Different than limit orders, stop orders can include some slippage, since there will typically be a marginal discrepancy between the stop price and the following market price execution.

Most trading platforms only allow a stop order to be initiated if the stop price is below the current market price for a sale and above the current market price for a buy. As such, stop orders are usually used in more advanced margin trading and hedging strategies.

When using margin, a stop sell can be set to initiate a short sell. When the stock is owned by the trader, a stop sell is usually used to limit losses or manage already accumulated profits.

Example: A trader has bought a stock at $35 a share but wishes to risk no more than a $5 per share loss on the trade. He places a sell stop order just below the $30 a share level, perhaps at $29.50. If the market price falls to the $29.50 level, then the sell stop order is triggered, and the trader's stock is sold at the next available market price.

Key Differences

The key differences in a buy limit and sell stop order are based on the order type. Understanding these orders requires understanding the differences in a limit order vs. a stop order. A limit order sets a specified price for an order and executes the trade at that price. A buy limit order will execute at the limit price or lower. A sell limit order will execute at the limit price or higher. Overall, a limit order allows you to specify a price.

A stop order includes a specific parameter for triggering the trade. Once a stock’s price reaches the stop price it will be executed at the next available market price. A stop order is usually designated for the purposes of margin trading or hedging since it commonly has limitations in price entry. Therefore, a buy stop must usually include a price above the market’s current price and a sell stop must include a price below the market’s current price. A buy stop order will be executed at the next available market price after reaching the buy stop price parameter. A sell stop would be executed at the next available market price after reaching the sell stop parameter. Buy stops are usually used to closeout a short stock position while sell stops are usually used to stop losses.

Key Takeaways

  • Most brokerage trading platforms offer five types of orders: market, limit, stop, stop limit, and trailing stop.
  • A buy limit order is a limit order to buy at a specified price.
  • A sell stop order is a stop order to sell at a market price after a stop price parameter has been reached.