Buy Limit vs. Stop Order

Stock traders profit from buying and selling stocks at optimal prices. Ideally, a trader buys a stock and sells it at a higher price. Some traders monitor their screens and look for the slightest stock price fluctuations. They wait patiently for a stock to reach a desirable price before buying or selling shares. What if you didn’t have to stare at the screen and wait to make those moves? Limit orders and stop orders can automatically make trades for you at your price points, but it’s important to understand a few key differences between these types of orders.

What is a Buy Limit Order?

A buy limit order is a request to your broker to buy or sebll shares at a designated price. Traders and investors can specify the most they are willing to pay to buy shares and the lowest amount they will sell shares for. Bullish and bearish investors can use limit orders to increase their gains.

Suppose a stock currently trades at $100 per share. A bearish investor believes the stock won’t perform well for a few weeks but doesn’t want to part ways with the stock at $100 per share. The investor can set a sell limit order of $101 per share. Your broker will sell shares at $101 per share once the stock reaches that price. 

A bullish investor may want to accumulate shares but wants to get a discount. The investor can set a buy limit order at $99, believing the stock can fall by $1. While saving $1 may not sound like much, it adds up if an investor wants to buy 500 shares. The investor saves $1 for each of those shares, resulting in a net savings of $500. With that extra cash, it’s possible to buy five additional shares and still have a few dollars left over (assuming you buy them at $99 per share).

How Does the Buy Limit Order Work?

A buy limit order instructs a broker to purchase a security at or below a specified price. For example, an investor may set a buy limit order for a stock at $50. The broker will execute the purchase only if the market price reaches $50 or lower. One key aspect of this type of order is the possibility of partial fills. This means the order may be executed for some shares while the rest may remain open for future execution. If the market price does not reach the limit price, the entire order may not be filled. Investors often set time limits on their buy limit orders to determine how long they stay active. These limits can range from a day to several weeks, depending on the investor's strategy and market conditions. Overall, a buy limit order allows investors to control their purchasing at a desired price while considering market dynamics.

What is a Stop Order?

A stop order is similar to a limit order. This type of stock order lets you designate the price that you want to buy or sell shares. When the stock reaches the designated price in the stop order, it becomes a market order. That means a stop order will be completely filled instead of partially filled. However, you could end up leaving money on the table with a stop order.

Suppose a stock trades at $200 per share. An investor may set a buy stop order at $199 per share. The stock order will automatically become a market order once the stock reaches this price point. However, if the stock reaches $199 per share briefly and immediately jumps to $199.20 per share, your order will go through at $199.20 per share instead of $199 per share. Limit orders avoid this problem and let you buy all of the shares at $199 per share. However, stop orders remove the risk of partial orders.

The same scenario applies to sell stop orders. A sell stop order at $201 does not ensure all of your shares will get sold at $201 if the price crosses that level. However, all of your shares will get sold at $201 per share or a price close to it once shares reach that level.

How Does the Buy Stop Order Work?

A buy stop order is a trading strategy used by investors. It lets them take advantage when market prices rise. This order is set above the current market price. It specifies a stop price that triggers the order. Once the market price reaches or exceeds the stop price, the buy stop order is executed. This allows traders to enter the market as prices go up. This order type is useful for investors who want to capture potential gains during price increases. By using a buy stop order, traders can enter positions in upward trends. It also helps them avoid paying more than a set limit. Essentially, it manages entry points in a bullish market. In summary, a buy stop order helps traders benefit from rising prices while controlling the execution price.

Comparing Limit Orders and Stop Orders

Understanding different order types is important for trading. Two common types are limit orders and stop orders. Limit orders let traders set specific prices to buy or sell assets. This gives them control over the price they accept. Stop orders, on the other hand, activate a trade when a certain price is reached. This can help reduce losses or secure profits during market fluctuations. Comparing these two orders helps traders see their benefits and drawbacks. This understanding can improve trading strategies and support informed decision-making.

Getting the Order Filled

A limit order can get partially filled if the stock briefly stays within the designated price. However, a stop order always gets filled completely. You won’t miss out on buying or selling the number of shares that you placed in the order.

Cost Basis

For a limit order, shares will only get purchased at the designated price or at a more favorable one. However, stop orders work differently. These orders become market orders when the stock reaches your desired price. Market orders can go through at a less favorable price than the one you designated for the stop order. Limit orders can be more profitable if they go through and get filled fully.

Visibility

Market participants cannot see your stop order, but they can see a limit order. This differentiator shouldn’t make or break your decision to use limit orders vs. stop orders, but it is a distinction between the two types of orders.

Total Returns

Limit orders and stop orders can both yield higher returns than market orders. You can save a few cents or dollars on every order instead of trading shares at the market price.

Risk Management

Limit orders help to manage risk by preventing bad trades, but they can also lead to missed opportunities if the set limit isn't met. Stop orders, especially stop-loss orders, work to safeguard profits but might not perform well during volatile market conditions. Stop-limit orders provide better price control, although they risk going unfilled when the market is turbulent.

Market Conditions

Limit orders are good for stable markets, but you might miss out in fast ones. Stop orders are better for volatile markets to limit losses or lock in profits. Stop-market orders guarantee execution but can have slippage, while stop-limit orders control price but may not execute in volatile conditions.

Flexibility

Limit orders let traders wait for a good price, while stop orders prioritize quick execution but can lead to bad prices in fast markets. Stop-limit orders find a middle ground between speed and price control but may not execute in volatile situations.

When to Use Limit Order vs. Stop Order

A limit order makes more sense for investors seeking the maximum return. Limit orders ensure you only buy or sell stocks at the designated price or better. Stop orders are more suitable for investors who do not want to worry about partially filled orders. These investors may be happy with buying shares slightly higher than the minimum stop order price if it means filling the entire order. The same approach applies to investors who would rather sell all of their designated shares, even if it means some of those shares are sold at a lower price than the stop order price.

Limit and stop orders both let you increase your total returns. The main risk with both of these orders is that the stock’s price moves further away from the price you set for the order. Patient investors can use limit and stop orders to increase their total returns and minimize risk.

Execute Market Orders with the Best Brokers

Investors can choose from several stock brokers to execute market orders. Here is a list of some of the top choices.

Execute Your Stock Orders With Confidence

Limit and stop orders can increase your returns and minimize your risk. Selling stocks at higher prices and buying them at lower prices will increase your total profit. You can set limit orders and stop orders with your broker so that you don’t have to monitor stock prices throughout the day. These orders can save you time and help you make more money as well.

Frequently Asked Questions