Stop Order Vs Limit Order: How do They Relate and Their Meaning in the Stock Exchange

Stop order and Limit Order are two different things. A stop order is a limit placed on the price at which you want to buy or sell an asset, while a limit order is just that - it's a limit placed on how much of an asset you can purchase/sell in one transaction.


Buy. You place this type of order when you're buying something. The market will then try to match your bid with other buyers' bids until all orders have been filled. If there aren't enough sellers for everyone who wants to trade, prices may rise above what you were willing to pay. This situation is called _bid-ask spread_ because the difference between the highest offer and lowest ask represents the amount of money people are prepared to spend on their shares.

 Sell: When selling, you set a lower price than the current asking price. Your goal here is to get as many offers below your desired price as possible before someone else buys from you.

Market order: Thi is the order to buy or sell immediately without regard to any limits. Market orders don't wait around for anyone to fill them; they simply execute instantly. They also tend to be more expensive than limited orders.

Fill rate: How often does a broker actually fulfill its clients' requests? It relies on several factors, like whether the client has a good credit rating, if the stock is actively traded, etc. But generally speaking, brokers charge about $10 per share for each request fulfilled. So if you needed to buy 100 shares of XYZ Corp. but only had $100 available, you'd need to make ten separate transactions to cover the cost of the brokerage fees.

Futures contracts: Futures contracts allow investors to speculate on future movements in commodity prices by trading futures contracts instead of actual commodities themselves. These contracts give traders exposure to specific quantities of oil, gold, silver, corn, wheat, soybeans, pork bellies, coffee beans, sugar, cotton, cocoa, orange juice, and so forth. 

Margin account: Margins are required whenever you use leverage to increase your investment potential. For example, let's say you borrow $1 million dollars against your home equity line of credit. That means you now owe another $1 million dollars. To protect yourself from losses, lenders require you to deposit additional funds into your margin account equal to 20% of the total value of the loan.

Differences between Stop order and Limit Order

1. Price level

When it comes to placing a stop order, you specify a certain price range within which you would like to see the security move. On the other hand, when using a limit order, you specify exactly where you want the security to end up. In both cases, however, you must provide some indication of the direction in which you expect the security to go.

2. Time frame

A stop order expires after a specified period of time. Once that time passes, the order automatically becomes inactive. However, a limit order remains active indefinitely unless you cancel it.

3. Execution method

A stop order can either be executed at once or over multiple periods of time. By contrast, a limited order cannot be executed at one moment in time. Instead, it requires an investor to submit his/her order every day, week, month, quarter, year, decade, century, millennium, etc.

4. Risk management

Stop orders do not guarantee execution. As such, they represent a higher risk strategy than limit orders. Because stop orders expire, they could become obsolete very quickly. Also, since stop orders are based on volatility rather than absolute values, they might trigger large moves even though the underlying securities haven't changed much.

5. Liquidity

Because stop orders expire, they typically involve less liquidity than limit orders. This makes them more suitable for short-term trades involving small amounts of money.

6. Cost

The costs associated with stop orders tend to be lower because there aren't any transaction fees involved. The main drawback is that stop orders don't offer as many opportunities for profit as limit orders.

7. Market impact

If you place a stop order below market levels, then this will have no effect whatsoever. If you place a stop order above market levels, then this may cause the security to trade outside of normal limits.

8. Trading volume

Here, we are trying to understand the difference between a limit order and a stop order. I have read that they both are used for market orders, but what is their purpose? What does each do differently from the other?

How Do They Compare?


·         Both types of orders allow investors to buy or sell shares without paying brokerage commissions.

·         A stop order lets you set a specific price point within which you'd like to see the share close. You also need to indicate whether you're buying or selling. When the stock reaches the target price, the order is triggered and executed immediately.

·         A limit order gives you greater control over how far the share price can fall before triggering the order. It's similar to a stop order except that instead of specifying a single price level, you specify a maximum amount by which the share price can drop. For example: "Buy 100 shares if the share closes today at $10."

·         Both types of orders require you to specify your intentions regarding the purchase or sale. But while a stop order triggers only when its conditions are met, a limit order can remain open until canceled.

Frequently Asked Questions

What Happens If My Order Gets Filled Before The Expiration Date?

When placing a limit order, you must specify the exact number of shares you want to buy or sell. So if someone else buys all the shares you wanted, you won't get anything. To avoid this problem, make sure to include enough margin so that your order doesn't exceed the total available supply.

Why Would Anyone Use A Stop Order?

You should consider using a stop order if you think the share price is going up too fast. A stop order lets you protect yourself against big losses. In addition, a stop order helps prevent you from being forced into taking huge profits prematurely.

Why Would Anyone Ever Use A Limit Order?

There are several reasons why people choose to use limit orders:

1.      It's possible to lose out on some potential gains if you wait too long to execute an order.

2.      You'll pay more in commission charges if you try to fill a limit order after the trading day has ended.

3.      You'll miss out on potentially profitable transactions if you fail to act promptly.

How Much Time Do I Have To Cancel/Execute A Limit Order?

Once you've placed a limit order, you have two options: Cancel the order or let it expire. There's no way to extend the deadline once the order expires. However, you can still modify the terms of the original order before the order expires.

Can I Cancel A Limit Order?

Yes, you can cancel any type of order as soon as it becomes active. If you set a limit order with a specified quantity, then you can always change the quantity later. This means that you don't have to worry about losing money because you didn't follow through on your initial plan.

If you place a limit order, will everyone know that I'm interested in purchasing XYZ Company's shares?

No one knows unless you tell them.

Is there a difference between a broker-dealer and a market maker?

Market makers provide liquidity for their clients' trades; they match buyers and sellers. Broker-dealers offer brokerage services such as clearing accounts, executing trades, providing research reports, etc.

Bottom Line

Stop order and Limit Order both serve different purposes but each comes with certain advantages and disadvantages. The choice depends on what kind of trader you are.