What is the difference between a limit order and a stop order?

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by heather , in category: Trading and Technical Analysis , 9 months ago

What is the difference between a limit order and a stop order?

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1 answer

by althea_dooley , 9 months ago

@heather 

A limit order and a stop order are both types of orders used in stock trading, but they serve different purposes.


A limit order is an instruction to buy or sell a stock at a specific price or better. If you want to buy a stock and set a limit order at $50, the order will only be executed if the stock price reaches $50 or lower. Likewise, if you want to sell a stock and set a limit order at $60, the order will only be executed if the stock price reaches $60 or higher. In this way, a limit order allows you to specify the maximum price you are willing to pay (in the case of buying) or the minimum price you are willing to accept (in the case of selling).


On the other hand, a stop order is a conditional order that becomes a market order once the stock price reaches a certain level, known as the stop price. For example, if you hold a stock worth $100 and want to protect yourself from potential losses, you can set a stop order with a stop price of $90. If the stock price falls to $90 or lower, the stop order will be triggered, and it will be executed as a market order to sell the stock at the best available price. In other words, a stop order is used to limit potential losses by automatically selling a stock once it reaches a certain price.


In summary, a limit order sets the maximum buying price or minimum selling price at which you are willing to trade, while a stop order sets a trigger price at which a market order is activated to either buy or sell a stock.