Stop Loss vs Stop Limit Order: Difference, Benefits, and Risks

stop loss vs stop limit

Rather than continuously monitor the price of stocks or other securities, investors can place a limit order or a stop order with their broker. These orders are instructions to execute trades when a stock price hits a certain level. A limit order is used to try to take advantage of a certain target price and can be used for both buy and sell orders. A limit order instructs the broker to trade a certain number of shares at a specific price or better.

Can Stop losses fail?

A stop-loss can fail as a loss limitation tool because hitting the stop price triggers a sale but does not guarantee the price at which the sale occurs. We see this often when the stock opens at a substantially lower price, but it can happen intraday as well.

However, at least we know that the loss is limited, which helps us control the situation. Fortunately, the price shown in the example above continued to decline as planned, and the stop-loss wasn’t triggered at all. Under a stop-limit order, you can specify that you would like to sell if it falls below a certain price, but you don’t want to sell it for any less than another price. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone.

Sell Stop Orders

Before jumping into using them, it’s important to explore the benefits and potential risks of each. Keep in mind that everyone’s situation is unique and the benefits for one might actually be a larger risk to someone else’s portfolio. It’s important to consider fully analyzing your options with a professional. A stop-loss order would execute the sale at $5, losing more money than you had intended.

stop loss vs stop limit

In some markets, traders are known for trying to take out known stop levels. Consider an investor who is long 100 shares of XYZ, and has entered a stop-sell order with a stop price of $50, and a stop limit price of $48.50. If shares of XYZ decline to stop loss vs stop limit the stop price of $50, the 100 shares of XYZ will be sold as long as a minimum price of $48.50 can be obtained. If the stock price has dropped sharply, and a sell order cannot be executed at $48.50 or higher, the 100 shares of XYZ will remain unsold.

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

If the price reaches this point, the Limit order will be executed. But if the price never reaches $100, the stock will not be bought.

  • You may confuse a Stop Loss order used to close a losing trade with a Stop order used to open a trade.
  • With a stop-loss order, when the contract price hits that level a trade is triggered and executed at the prevailing market price.
  • However, the difference between the two shows up when the price hits the stop.
  • Meanwhile, stop orders trigger a purchase or sale if selected assets hit a certain price or worse.
  • The stop loss needs to be placed within 30 minutes after the opening of the position.

The first step to using either type of order correctly is to carefully assess how the stock is trading. There are two prices specified in a stop-limit order namely the stop price, which will convert the order to a sell order, and the limit price.

Investor Alerts and Bulletins

Limit orders can be compared with Stop orders as they are executed at a specified price. But in this case, it is known as a limit price and comes with a critical difference. The trade price cannot be less beneficial than the specified limit price. You expect the upward trend to continue, but you want to protect your funds from losses in case the market falls and sell the asset before its price becomes too low.