What is the difference between limit orders and stop-loss orders?
A stop-loss does not execute until the target price is reached, whereupon it becomes a market order.
A limit order executes at the target price or better.
Suppose that you paid $100/share for XYZ stock. If you’re worried about losing money on the investment, you might place a stop-loss sell order at $90. Should the price fall to $90, your order will be executed at the market price (likely less than $90). If you want to make some money and get out of XYZ, then you might place a limit sell order at $110. If you can sell the stock for $110 or better, you’ll be happy to sell it; if the price remains below $110, you’ll be happy to keep it.
So, in general, you place a stop-loss sell order at a price below the current market price, and a limit sell order at a price above the current market price.
There are also stop-loss buy orders and limit buy orders, which you would use if you had a short position in XYZ stock.
(Note, too, that technical analysts might place stop buy orders at a price above the current market price: at a resistance level (or a little higher). The idea is that they don’t want to buy unless the stock shows upward price momentum. Conversely, they might place stop sell orders at a price below the current market price: at a support level (or a little lower).)
Thanks for the help
My pleasure.
Not sure if this is an FRM specific question since I’ve never taken it but there are also STOP-LIMIT orders where a limit order is placed when the price reaches your stop level. This eliminates potential slippage from using a stop-market order at the expense of potentially missing a fill. Stop levels can be triggered by last traded prices, bids, or offers.
Limit orders are those orders which you place by giving a certain amount for Buy or sell orders . Suppose the current market price for the stock is 50 . And you want to buy it at the lesser price say when it reaches 47 . So you have to place a Limit buy order for this at 47 .
Stop loss orders are those orders which are put to limit the losses on original orders . Suppose you baught certain amount of shares at 100 . And you dont want the lossess on this order beyond 3 . So you will put a sell stop loss order at 97.