What's the difference between a limit order and a stop or stop limit order?

Question

I don't know a ton about stocks or buying, just learning as I go. I set up my Scottrade account to buy a stock at limit .24 on Monday, after the stock had closed at .2399 on Friday. I was going to catch it on it's way up if it went up again, and if it lowed, great, then I'd watch the action during the day and be able to buy even lower. I discovered that Scottrade had automatically bought at .22, which confused me since my order was specifically for .24. I was told that a limit order buys either at the price I set or the next best thing. So since the stock opened at .22, it automatically bought. The stock then dropped to .20, which is probably when I would have bought during the day but now couldn't since Scottrade did it for me. I was obviously not clear on what a limit order is.

If I wanted to set it to buy at a certain price should a stock go up, but I DO NOT want it to automatically buy the 'next best thing' below what I set my buy at, what kind of transaction would that be?

Answer 1

It may not have been your intent, but Scottrade did exactly what you directed them to do. If you place a limit order at .24, you are saying buy at .24 or less. Since the stock opened at .22, that is less than your .24 limit. So the order was filled.



A limit order should be used when you want the stock price to drop before you buy. In the case you cited, if you didn't want to buy at .22 you should have place a limit of .21 or less. Placing a limit buy "above" the last price is very likely to produce a quick transaction.



The closest thing to what you want is a stop limit order. You would have placed the stop at .24. When the price went above .24 your order would have been executed, if it could be filled below your limit. The problem is that your limit would have to be above .25 or higher. Which means you would have bought at a higher price than you got. Or not bought at all since the price went down.



You can not place an order to "not buy" the "next best thing." You set limits, and when the share price falls within those limits your order is executed.



Note that these type of orders are handled differently by different exchanges. And they do not have priority. If you are going to use a stop or stop limit orders you need to study the way they work. The simplest thing is to stick with market orders and limit orders until you get some more experience.

Answer 2

A limit order is one where you set the price limit you want to sell or buy at. If you don't set this it will just sell or buy freely with the market, you loose some control over the price. Say you want to buy stock of a company but you don't want to pay too much. The market is fluctuating between $59 and $60 a share. You can place a limit order to buy for $59 so that when it's in the market it will cost you no more than $59. A stop order is one that does not become active until a certian price is reached. Once that price point is reach the order becomes active. Say you own shares of a company and if the price goes above a certian price you want to sell and take the profit. You bought at $59 and the price goes up to $65. To protect your profit you can set a stop order for $63 dollars. If the price goes up you still hold on to the stock. If the price goes down to $63 the stop order is trigger and it becomes a market order. The system automatically sells the stock on the open market to protect your profit. A stop limit order is a combination of a stop and limit order. Like a stop order the trade will not be placed until a certian price is reached. But instead of a market order, it's a limit order. In the last example say you set the stop order to a limit of $63. When the stock hits $63 the order is activated but the trade will only accept a minimum $63 sell prices. These can be tricky because if the price has gone down it may go below your limit price and no buyer will take your stock.

Answer 3

You should have used a STOP MARKET buy order rather than a LIMIT buy order.



These other people saying you should have used a STOP LIMIT order are dead wrong. If the stock had risen to 24 your stop would have been triggered, but the limit would have meant you weren't willing to pay more than 24. If the stock moved quickly your order would not have been executed, since it was moving above 24.



Here's a quick rundown of the different kinds of orders.



1. Market order

A market order will execute a trade for you at the best current price. For example, the last trade on XYZ was 25.10, and the current bid (the price someone is willing to pay to buy) is 25.07, and the current ask (the price someone is willing to accept to sell) is 25.13. If you place a market order to BUY you will pay 25.13, which was the best available price offered. If you place a market order to SELL, or SELL SHORT you will get the 25.07 price, which was the best available offer made for stock.



2. Limit order

Using the same XYZ example, let's say you want to buy the stock, but the highest price you are willing to pay is 24.50. You can place a limit order to buy at 24.50, and your order will go on a list of all the current bids. You have become a bidder. Since there are other bidders willing to buy at a price above yours, your order will be lower on the list. But if the stock trades down to 24.50, the other bids will be executed (or canceled by the bidders themselves) and yours will be executed at 24.50 or better (lower). Sellers of stock (or short sellers) would have the reverse situation (e.g. a limit order to sell at 26 would be executed at 26 or higher, if the stock traded up to that level).



3. Stop order

A stop order is like a limit order in that it only becomes active when a specified price is reached. But it's very different in other ways. A stop order becomes a MARKET order once the specified price is reached. This is what you wanted to do with your trade. You wanted to buy the stock if it reached 24, so a stop buy order would have been the way to do it (although in your case it wouldn't have been executed since the stock never reached that level, but that was what you wanted to be sure of, so it would have been the correct move). In the XYZ example a stop buy order could be placed at 26, and if the stock rises to 26 the order will be executed at the best available price (the bid), which will be fairly close to 26.



Your mistake was using a limit order instead of a stop order. The limit order said you were willing to buy the stock at the best (lowest) available price BELOW 24. Since the stock was already trading well below that level, your order was executed immediately, at the current ask, which was 22.



Hope that all makes sense. Don't feel too bad, I made the same mistake starting out.

Answer 4

These are orders that are pending trades to be executed into market orders when the following of the two happen:



Limit order is an order that you state you are willing to buy at. If you say you want to buy at 4 dollars and the stock is trading at 3.99, the trade won't execute till it hits 4 dollars.



Inversely, a stop order trades when a stock falls at a specific amount you specify. If the stock is trading at 7 and you specify a stop order to be 5, the stock will sell when it hits 5. You can save money if the stocks plumits or if the stock goes back up to 7 you might lose the two dollar difference. It's all about risk!



If you want to just do a normal trade, select Market Order which will execute immediately.



Limit order: You are wanting to buy a stock.

Stop order: You own the stock already.

Answer 5

A limit order is as you say -the price you set or better. If it's a buy limit order, cheaper is better right?



A stop order is a trigger - you enter a stop price, after which the trade is done at the next market price.



A stop limit order is what you're after - The stop will throw the trigger, and then your limit will prevent it from being executed above/below (sell/buy) the level you set.



There's other qualifiers, such as fill/kill, all or nothing, day, market, etc.....

Answer 6

You might want to read a bit more. It sounds like you are trying to do some sort of momentum tading strategy which would not be best for a beginner. You might want something like a training stop order but you'd need a special relationship with your broker for that.



You might want to get the basics ("buy low, sell high") before getting complicated.



The diffference in a stop and limit order is what happens when the boundary price is reached. You can read about order types at the link below.