Question
What is a Limit Order and how is it different from a Stop Loss Order?Answer
Stop loss and limit orders are broadly similar in that they instruct your stockbroker to buy or sell shares in a company when they hit a pre-determined 'trigger' price. But there is a fundamental difference in how they work, as follows:
A stop loss order instructs the broker to place a buy or sell order when the shares hit an agreed price. But as the subsequent order will be placed in the market the actual price you buy or sell at might be different to the stop price you specified - especially if the price is rising or falling fast.
For example, you place a stop loss to sell shares you own in company X at 50p. The share price, currently 70p, suddenly plunges and the order is triggered as the price passes through 50p. By the time the trade is placed the share price might have fallen below 50p, so although sold you receive less than 50p per share - the difference is often referred to as 'slippage'.
A limit order is similar but the broker must sell at the limit price (or better) else not all. So in the above example, unless the broker can sell at 50p or more (once the price hits 50p) they won't trade. This means there's no guarantee a deal will be executed, but if it is you won't suffer from slippage.
Perhaps the simplest way to think of the difference is that a limit trade must be placed at the stated price or better else not at all, while a stop loss will be placed at the stated price or worse guaranteed.
For popular shares in large companies a stop loss order should work fine unless volatility is especially high.
What is a Limit Order and how is it different from a Stop Loss Order?Answer
Stop loss and limit orders are broadly similar in that they instruct your stockbroker to buy or sell shares in a company when they hit a pre-determined 'trigger' price. But there is a fundamental difference in how they work, as follows:
A stop loss order instructs the broker to place a buy or sell order when the shares hit an agreed price. But as the subsequent order will be placed in the market the actual price you buy or sell at might be different to the stop price you specified - especially if the price is rising or falling fast.
For example, you place a stop loss to sell shares you own in company X at 50p. The share price, currently 70p, suddenly plunges and the order is triggered as the price passes through 50p. By the time the trade is placed the share price might have fallen below 50p, so although sold you receive less than 50p per share - the difference is often referred to as 'slippage'.
A limit order is similar but the broker must sell at the limit price (or better) else not all. So in the above example, unless the broker can sell at 50p or more (once the price hits 50p) they won't trade. This means there's no guarantee a deal will be executed, but if it is you won't suffer from slippage.
Perhaps the simplest way to think of the difference is that a limit trade must be placed at the stated price or better else not at all, while a stop loss will be placed at the stated price or worse guaranteed.
For popular shares in large companies a stop loss order should work fine unless volatility is especially high.
Read this Q and A at http://www.candidmoney.com/questions/question546.aspx
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