When an investor confuses a stop-loss order and a limit order, there are serious financial consequences. Although both of these order types are designed to trigger an action with owned stock, those actions are significantly different. Most investors use stop-loss and limit orders to protect themselves from losing money on a stock trade. When used correctly, these methods can be effective.
Understanding Market Orders
When an investor wants to sell stock, he typically contacts his stockbroker and places an order to sell the stock. The order to sell is then placed by the broker, and stocks are sold at the current stock price. This price is known as the market price of the stock.
Understanding Stop Orders
Stop orders are filled only when the requested stock price is met or is better. If you are selling stock, this means the price must be at or higher than you specify; if you are buying stock, the price must be at or lower than you specify. These orders, more commonly called stop-loss orders, protect investors from losing money or spending too much money on a stock trade. A stockholder contacts her investment broker and places an order at a specific price. When the price is met or exceeded, the order will be complete.
Understanding Limit Orders
When an investor wants to buy or sell a stock at a specific price, he might use a limit order. Investors who want to make sure they do not pay more for a stock purchase, or who want to earn a specific amount on a stock sale, use limit orders. One danger of a limit order is that the trade might never come to fruition; the order will not be executed if the stock does not meet the stated price.
Stock market investing is always risky. Investors can control their expenditures and their potential losses using either stop-loss or limit orders. Understanding how these types of orders work is crucial to meeting your investment needs.
Doreen Martel is a writer specializing in finance, nonprofit organizations and real estate. She has worked in the financial industry for more than 20 years. Martel is a graduate of Dean College in Franklin, Mass., holding a certificate in accounting.