Among the tricky things in stock trading, one of the most important are types of orders that investors use to protect their investments. Of these, stop limit orders and stop orders are two of the most popular and useful tools, and they have different, but specific uses. Getting to know the main differences among these orders can have a huge impact on your trading strategy and results.
A stop limit order is essentially a hybrid between a stop and limit order. When an investor submits a stop limit order, they indicate the maximum price (if buying) or minimum price (if selling) they are willing to accept for execution. This limit order only triggers once the stock reaches that price or above. Here’s how it works. For instance, say you want to invest in a certain company but are concerned about the stock price dropping suddenly. The investor only leverages the market in response to reaching that important price threshold. After that, their order automatically converts to a limit order. That means it will only fill if the price is equal to $67 or better.
A stop order operates differently. When an investor places a sell stop order at $67, they trigger this strategy. If the stock price ever falls to $67 or lower, their order immediately becomes a market order. The trade will get filled at the next available market price. This price may be greater than or less than the stop price of $67. This subtle difference in execution can make a huge difference in results, marking the distinction between success and failure in turbulent markets.
To illustrate, imagine an investor who would like to buy the shares of a stock that is currently trading at $45. If they enter in a buy stop order at 50, it will trigger. This happens when the price of the stock goes up to $50 or above. At that time, it becomes a market order. It just executes at whatever the market price is at that time, regardless of whether that price is above $50 or below.
A stop limit order is ideal for price-sensitive traders who want to have more control over their execution price. This is because it guarantees that the order will be executed at a given price or better. There is some risk in this strategy – if the market fails to reach the limit price, your order will not be executed. Get ready for that chance to connect and collaborate!
Stop orders provide a simple and straightforward approach. They execute immediately as soon as the defined threshold is crossed. This is especially beneficial in times of extreme market volatility where price and execution changes quickly.
There are some specific requirements investors need to know about stop limit orders. Companies generally need to make a minimum investment of $2,000 for these kinds of orders. Or, for specific eligible securities acquired on margin, you can use 50% of the purchase price. In addition, you can use half of the short-sale proceeds. These stipulations, along with other provisions published in the final rule, are critical for investors to understand when executing their trades.