Stop order vs. limit order: What's the difference?

There are three different order types, which each have their own effect when trading: market orders, limit orders and stop orders.

Let me start with what a stop order is, and how to use it?

A stop order is an order to buy or sell a stock at the market price if it trades at or above a specific price (the "stop price"). If the stock reaches the stop price, the order becomes a market order and is filled at the next available market value. The order isn't carried out if the stock fails to reach the stop price.

A stop-loss may be appropriate in the following scenarios:

• When a stock you own has risen, and you don't want to lose money if it drops, place a stop order.
• When you want to invest in a stock that has broken out above a certain point, it will rise based on your analysis.

A sell stop order, often known as a "stop-loss" order, is used to help protect an unrealized profit or reduce a loss. A sell stop order is placed at a lower price than the current market price; if the stock falls to the stop price (or trades below it), the stop order to sell is triggered and becomes a market order to be carried out at the current market price.

Because your stop price is at the market or better, your sell stop order will not necessarily be filled near to it.

Stop orders can be used to buy as well. A buy stop order is placed at a higher-stop price than the current market price (in essence, "stopping" the stock from running away from you as it rises).

So, what is a limit order, and how does it work?

A limit order is an instruction to buy or sell a stock at a specific price (the "limit price"). If the order is completed, it will only be done at or above the specified limit price.

However, there is no assurance of completion. When you think you can buy at a price lower than—or sell at a price higher than—the current quotation, a limit order may be useful.