When you place an order to buy or sell a stock, you have to choose one of three order types: limit, market, or stop. Each order type has its own advantages and disadvantages, so it’s important to understand the difference between them before you place an order while trading it.
Limit orders
A limit order is an order to buy or sell a stock at a specific price or better. This means that your order will only be executed if the stock price reaches or falls to your specified price. For example, if you place a limit order to buy a stock at $100, your order will only be executed if the stock price reaches $100 or lower.
The advantage of a limit order is that you can guarantee that you will not pay more than your desired price for a stock or sell a stock for less than your desired price. However, the disadvantage of a limit order is that your order may not be executed if the stock price does not reach your specified price in trading activities.
Market orders
A market order is an order to buy or sell a stock at the current market price. This means that your order will be executed immediately, at the best available price. For example, if you place a market order to buy a stock, your order will be filled at the current bid price, which is the price that buyers are willing to pay for the stock.
The advantage of a market order is that your order will be executed immediately, even if the stock price is volatile. However, the disadvantage of a market order is that you may not get a good price for the stock. If the stock price is moving quickly, you may end up paying more than you wanted for the stock or selling the stock for less than you wanted.
Stop orders
A stop order is an order to buy or sell a stock while trading once the stock price reaches a certain price. This is a type of conditional order, which means that it will only be executed if the stock price reaches your specified price. For example, if you place a stop order to buy a stock at $100, your order will only be executed if the stock price reaches $100 or higher.
The advantage of a stop order is that it allows you to protect your profits or limit your losses. If you own a stock and you want to protect your profits, you can place a stop order to sell the stock once the price reaches a certain level. This will ensure that you do not lose money if the stock price falls. Similarly, if you short sell a stock, you can place a stop order to buy the stock back once the price reaches a certain level. This will ensure that you do not lose more money than you are willing to lose.
The disadvantage of a stop order is that it may be executed at a price that is different from your specified price. This is because the stock price may move quickly between the time you place the order and the time it is executed while trading.
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