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Difference between Limit and Stop Order

Introduction

Investor needs to keep themselves abreast with the different terms used in the market. For example, an order in the trading world implies instruction, and other orders can have different outcomes. Let us check here the Limit and Stop Order.

Limit Order vs Stop Order

Even if you are a full-time trader, monitoring the market every single minute is a challenging task. This is where the importance of Stop and Limit Order enters. Orders are standing instructions with your brokers, asking them to execute a transaction, or taking a trading position when the share prices hit a certain threshold level. Hence, it eliminates the need to continuously time the market and shift the responsibility to your broker.

Limit Order

A Limit Order is an instruction to your broker to buy or sell a stock at your desired price limit and not above or below it. For example, on the buying side of things, a Limit Order is to purchase a specific stock at the limit of, say, Rs. 500 or even lower if a better deal is available. In this example, the buying limit is Rs. 500. If the broker can crack a deal at an even lower buying price, that would be ideal. Similarly, in a Sale Limit Order, the standing instruction is to sell at the limit price or go higher if possible.

Stop Order

A Stop Order is a stop-loss order. Simply put, it aims to limit up to which you can sustain losses in trading. As for Buy Orders implies buying the stock as soon as the price climbs above the desired level. Meanwhile, Sell Orders means selling the stock as soon as it dips below the desired level.

The Limit and Stop Order are both subsets of varying market orders that exist in the trading markets. However, when we put Limit Order vs Stop Order, some inherent differences are spotted between the two:

  • A Limit Order gets placed with an intent to lock in the desired price and to attain at least that price level or, even better, in both sell or buy order positions. Whereas a Stop Order exists to limit losses and make better in situations where the market is not moving in your favour.

  • Market traders can see and fill under the Limit Order. For example, if the current trading price of your stock is Rs. 100 and you have put a Sale Order at Rs. 150, ­there is a possibility of finding takers for it at your desired level. However, in Stop Order, your desired price level is not viewed by the market until it gets triggered by the demand and supply forces.>

  • If you look at the mechanics behind a Limit Order, it implies an optimistic approach to trading as you expect the market to move in your favour and earn the desired value from your transaction. Whereas a Stop Order is a pessimistic measure that looks to minimise loss from your trading position. It is applicable in situations wherein the market sentiment is moving opposite to your desire.

 

Also Watch: Market Order vs Limit Order

Conclusion

The Limit Order and Stop Order functionalities are in place to help traders like you and me. It offers an excellent opportunity to time the markets and get a good deal without your constant supervision. However, you must learn how and where to exercise these orders; this can get counterproductive.

Keywords Used

Limit order – 7 times

Stop order – 7 times

Limit order vs stop order – 1 time

Disclaimer:

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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