A Comparison of Limit and Stop Orders: An Overview
You can be more particular about how you want your broker to fill your trades with different sorts of orders. When you place a limit or stop order, you're telling your broker that you don't want your order to be executed at the market price (the current price at which a stock is trading); instead, you want it to be executed when the stock price matches a price that you specify.
Before the comparison of Limit and Stop Orders we would like you to know that at Zebu, one of the fastest-growing brokerage firms in the country, we have created the best Indian trading platform and lowest brokerage for intraday trading.
Between limit and stop orders, there are two major distinctions. The first is that a limit order utilises a price to specify the transaction's least acceptable amount, but a stop order uses a price to simply trigger an actual order after the given price has been transacted. The second difference is that a limit order is visible to the market while a stop order is not until it is activated.
If you want to buy a Rs 100 stock for Rs 95 per share, for example, the market will recognise your limit order and fill it when sellers are willing to meet that price. The market will not see a stop order, and it will only be activated when the stop price is met or surpassed.
If the price triggers the stop in a standard stop order, a market order is placed. If the order is a stop-limit, a limit order will be placed conditional on the triggering of the stop price. As a result, a stop-limit order will necessitate both a stop and a limit price, which may or may not be the same.
Limit Orders
A limit order is a purchase or sale order for a certain stock at a specific price. For example, if you wished to buy Rs 100,000 worth of stock for Rs 100,000 or less, you can place a limit order that will not be completed unless the price you stated becomes available. However, because a better price is already available, you cannot place a simple limit order to buy a stock above the market price.
You can also use a limit order to sell a stock at a certain price when it becomes available. Assume you hold Rs 75 per share of stock and wish to sell if the price rises to Rs 80 per share. A limit order of Rs 80 can be placed, and it will only be filled if the price is equal to or better than that. Because there are better prices available, you cannot set a limit order to sell below the current market price.
Stop Orders
Stop orders are offered in a few different forms, but they are always conditional on a price that is not yet available in the market when the order is made. A stop order will be activated when the future price is available, but the broker will execute it differently depending on the kind.
When your stop price is hit or exceeded, a standard stop order will become a traditional market order. If you intended to open a position when a stock's price was increasing, you could place a stop market order above the current market price, which would then become a regular market order if your stop price was met.
Stop-Limit Orders
There are two prices in a stop-limit order: a stop price and a limit price. When a certain stop price is met, this order type can activate a limit order to purchase or sell a securities. Assume you buy shares for Rs 100 with the expectation that the stock will climb. If your prediction was incorrect, you might sell the shares using a stop-limit order.
If you put the stop price at Rs 90 and the limit price at Rs 90.50, the order will go into effect if the stock trades for Rs 90 or less. A limit order, on the other hand, will only be completed if the limit price you specify is accessible in the market. The order will be activated if the stock drops overnight to Rs 89 per share, which is below your stop price, but it will not be filled immediately because there are no buyers at your limit price of Rs 90.50 per share. In this order scenario, the stop price and the maximum price may be the same.
There are two main hazards with a stop-limit order: no fills or incomplete fills. It's possible that your stop price will be activated while your limit price remains inactive. It's possible that if you used a stop-limit order as a stop-loss to exit a long position when the stock started to fall, your trade would not be closed.
Even if the limit price is available after a stop price has been triggered, if there isn't enough liquidity at that price, your entire order may not be executed. If you wanted to sell 500 shares at a Rs 75 limit price but only 300 were filled, you may incur further losses on the remaining 200 shares.
A stop order eliminates the risk of no fills or partial fills, but because it is a market order, it is possible that your order will be filled at a price that is far lower than what you expected. Consider the following scenario: you've placed a stop order at Rs 70 on a stock that you purchased for Rs 75 a share.
After disappointing investors, the company publishes earnings after the market closes and opens the next day at Rs 60 per share. Your order will be activated, and you may exit the trade at Rs 60, well below your stop price of Rs 70.
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