Stop and Limit Orders

Definition

A Stop (or stop loss) order and limit order are orders that try to execute (meaning become a market order) when a certain price threshold is reached. Limit and stop orders are mirrors of each other; they have the same mechanics, but have opposite triggers.

When creating a limit or stop order, you will select a ticker symbol and quantity, just like a market order, but you will also select your “Target Price” as well. The target price is the price that triggers the limit or stop. Setting a target price does not guarantee you will get that price, it just means a market order will be created at that time. If there is not enough volume in the market to fill your order, it still may not execute.

Limit

A limit order will set the maximum price I am willing to buy(cover) at or the minimum price I am wiling to sell(short) at.

Example

Let’s say Verizon ([htmwquote]VZ[/htmwquote]) is at \$50, but you think it is overpriced and want to buy it once it falls. By setting a limit order at a target price of \$45 we can wait until the price reaches that without having to sit in front of a screen. As long as the price is greater than \$45 it will not execute. As soon as the price drops to \$44, your stop order becomess a market order, filling at \$44.

Here is a chart showing how a “Limit Buy” order works, showing a sample stock’s price over the course of a day:

Stop

A stop order will set the minimum price I am willing to sell, or short a stock. It can also mean the maximum price at which I am willing to buy, or cover.

Example

Let’s say you own PayPal stock ([htmwquote]PYPL[/htmwquote]) that you bought at \$25. If the current price is \$31, you want to keep holding the stock in case the value continues to rise, but you do want to protect the gains you made.

You can put a “Stop Sell” order with a target price of \$30, so if the price of the stock falls to \$30, you will be protected from any more losses. If the value continues to rise, you will continue to hold the stock.

The table below can be an easy reminder of when a stop or limit order will execute.