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Stop-Loss vs. Stop-Limit: What’s the Difference and Which Should You Use?

StockInvest.us
08:52am, Thursday, Oct 13, 2022

When trading, it is vital to use stop-loss and stop-limit orders to protect your investments.

These two types of orders are very different, and knowing which one to use can be confusing. In this blog post, we will explain the difference between stop-loss and stop-limit orders and help you decide which one is right for you.

What Is a Stop-Loss order?

A stop-loss is an order you place with a broker to sell a security when it reaches a certain price.

You might use a stop-loss if you are worried about the stock market going down and you want to limit your losses. A stop-loss order to sell is a trader order that instructs a broker to sell a security if its market price drops to or below a specified stop price.

For example, you bought 100 shares of A Company for $50 per share. You might place a stop-loss order at $45 per share. If the price of A Company falls to $45 per share, your stop-loss order will be triggered, and your shares will be sold automatically.

It is important to note that stop-loss orders do not guarantee that your shares will be sold at the stop price. If there is a sudden drop in the security price, your shares may be sold for less than the stop price. This is because when there is a lot of selling pressure in the market, it can take some time for your broker to find buyers for your shares.

And what is a Stop-Limit order then?

A stop-limit order is similar to a stop-loss order but with a few crucial differences. Stop-limit can also be used for buy orders. With a stop-limit order, you set two prices: the stop price and the limit price.

The stop price is when your shares will be sold automatically. The limit price is the minimum price for which you are willing to sell your shares.

Let us say you want to buy at a max of $150 per share, so you set the trigger at $148 and the limit at $150. And it means that no buying above $150.

A sell limit works the same: trigger price and a limit.

Stop-limit orders give you more control over the price at which your shares are sold, but there is also a greater risk that your shares will not be sold.

Stop-Limit vs. Stop-loss. Which one is better?

Now that you know the difference between stop-loss and stop-limit orders, you might wonder which is better.

The answer to this question depends on your investment goals and risk tolerance.

If you are worried about the stock market going down and want to limit your losses, a stop-loss order might be a good choice.

However, if you are willing to take on more risk in exchange for the chance of earning a higher return, a stop-limit order might be a better choice.

It is important to remember that neither stop-loss nor stop-limit orders guarantee that your shares will be sold at the price you specify. If there is a sudden drop in the security price, your shares could be sold for less than the stop price.

Before you decide which type of order to use, you should talk to a financial advisor about your investment goals and risk tolerance, they will be able to help you choose the right type of order for your needs.

Advantages & Disadvantages of both:

Stop-loss advantages:

  • It helps limit losses in a smart way;
  • Such a strategy can save your time and minimize your need to monitor prices constantly;
  • Stop-loss orders are customizable and available for every trader;
  • It helps traders and investors in terms of discipline in the short term;
  • Minimize the emotional effect.

Let's speak about the disadvantages of stop-loss orders:

  • Stop-losses can get triggered by price gaps;
  • You can experience slippage;
  • It doesn't work during periods of high market volatility.

On our website, you will always find our recommended stop-loss levels:

Stop-limit advantages:

  • More control over the price;
  • Still, a good way to limit losses.

Stop-limit disadvantages:

  • There is always a chance that your order won't execute;
  • It can be hard to predict the perfect stop and limit price;

The difference between stop-loss and stop-limit is that stop-loss is used for selling, whereas stop-limit can be used for both buying and selling where the limit is the defined max/min.

To sum up, stop-loss is more recommended for newbies, while stop-limit - is for experienced traders who know how to set stop and limit prices correctly. And, of course, it all depends on personal preferences as well. Try both and see what suits you more.

Conclusion.

Stop-loss and stop-limit orders are two different ways of limiting your losses when you sell or buy a stock.

Which order is better depending on your investment goals and risk tolerance.

Before you decide which type of order to use, it is important to talk to a financial advisor about your investment goals and risk tolerance, they will be able to help you choose the right type of order for your needs.

We hope this article helped you understand the difference between stop-loss and stop-limit orders.


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StockInvest.us

StockInvest.us is a stock market research tool that provides daily stock signals and technical analysis for over 25 000 tickers on 38 exchanges. The company was founded in 2016 in Vilnius, Lithuania.