Limit Order vs. Stop Order: What’s the Difference?

Limit Orders vs. Stop Orders: An Overview

A limit order is a tool used by traders to make a purchase or sale at a specific price or better. A stop order executes a market order. A trader will pay the market’s best available price when the order is filled.

Limit Orders

A limit order is an order to buy or sell a certain security for a specific price or better. You can set a limit order that won’t be filled unless the price you specified or better becomes available if you want to purchase shares of a $100 stock at $100 or less.

You can similarly set a limit order to sell a stock when a specific price or better is available. Imagine you own stock worth $75 per share and you want to sell if the price gets to $80 per share. A limit order can be set at $80 which will only be filled at that price or better.

Limit order example

Let’s say you want to invest in the stock of Company A. The stock trades at $10 per share but you believe the stock will drop down to $8. You place an order of 100 shares at a limit price of $8. The price drops below the $8 limit a few days later so your shares should be purchased.

Now consider how the order works on the sell side. Let’s say you want to sell the same company’s stock which trades at $15 a year later. You think this is too low. Your limit for selling is $20 per share. You can set a limit order to sell 100 shares once the stock price reaches your limit.

Stop Orders

Stop orders come in a few variations but they’re all effectively conditional based on a price that’s not available in the market at the time the order is placed. A market order will be triggered when the future specified price is available.

A market order is simply an order to sell or buy at the existing price. It’s something like a default order. It’s what’s entered if the investor doesn’t request an alternative action.

Many brokers use the term “stop on quote” for their order types to make it clear that the stop order will be triggered only when a valid quoted price in the market has been met. A stop order will be triggered only if a market price of $100 or better is reached and you set a stop order with a stop price of $100.

Stop order example

Say you want to buy Company B stock which trades at $25. You believe that the price will break above that threshold. You can place a buy-stop order by setting a limit on the price of $26.75 per share for 50 shares. The order turns into a market order and is processed as soon as the price reaches your preset limit.

Here’s how it works on the sell side. Let’s say the company’s stock trades at $25 but you want to protect yourself from a big drop in the price so you decide to set a sell limit at $22. It triggers your order if there’s a drop and someone sells at or below $22. The order becomes a market order and is processed by your broker.

Stop-Limit Orders

A stop-limit order has the features of both the limit and stop order and eliminates the risk that a price can’t be guaranteed. It increases the risk that the order might not be filled, however.

It consists of two prices: a stop price and a limit price. A stop-limit order activates a limit order to buy or sell a security when a specific stop price is met.

Stop-limit order example

Say you purchase shares at $100 a share and you expect the stock to rise. You could place a stop-limit order to sell the shares if your forecast was wrong.

• The order will activate if the stock trades at $90 or lower and you’ve set the stop price at $90 and the limit price at $90.50. A limit order will be filled only if the limit price or better that you selected is available on the market, however.
• The order to sell will be placed if the stock drops overnight to $89 per share but it won’t be filled immediately because the market is closed. The share will be sold at the best price the next trading day morning.

Stop-limit risks

A stop-limit order has two primary risks: no fills or partial fills. It’s possible for your stop price to be triggered and your limit price to remain unavailable. It might not close your trade if you used a stop-limit order as a stop-loss to exit a long position when the stock started to drop, leaving you with less valuable shares that could continue to decline.

Your entire order might not be executed if there isn’t enough liquidity at that price even if the limit price is available after a stop price has been triggered. You may suffer further losses on the remaining 200 shares if you wanted to sell 500 shares at a limit price of $75 but only 300 were filled.

A stop order avoids the risks of no fills or partial fills but it’s a market order so you may have your order filled at a price that’s worse than what you were expecting.

The Bottom Line

A limit order tells your broker to buy or sell an asset at an indicated limit price or better. A stop order initiates a market order which tells your broker to buy or sell at the best available market price once the order is processed.

Disclosure: Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.