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I am totally confused about StoP and Limit Orders. I have visited so many websites that I can say the definitions backwards. Please just explain in simplest possible words the difference between the two orders if at all there is any difference. Limit Order I think is easier to understand whereas Stop Order is freaking me out. I have read numerous threads on Yahoo with the same example "If you own ABC stock and place a Stop Order at $90.00, your stock will be sold the moment it drops below 90. What kind of moron would want to sell his/her stock at a lower price? Why would I wait for the prices to fall below a certain point to sell my stock? Won't it increase my losses? Woudn't anyone want to sell the stock when the price is right?Based on the above, I guess the same moron may place a Limit Order to buy stock if the price climbs above a certain point. It doesn't make any sense.Since Stop Orders are so complicated, I have not even glanced at Stop Limit Order yet. PLEASE HELP!!

2007-08-24 16:55:46 · 4 answers · asked by iNsUrEdByMaFiA 2 in Business & Finance Investing

4 answers

Stop and limit orders don't make sense without specifying if they are sell or buy orders.

Stop sell orders are frequently called stop-loss orders because they are intended to cut off a loss before it gets too big. What actually happens with a stop sell order is that when the stock trades at the stop price, an order is automatically placed to sell at the market, which means at whatever price the broker can get. There is no guarantee that the actual sale price will be the same as the stop price. Depending on your trading strategy, this isn't necessarily idiotic. A lot of traders and investors live by the rule that you let your winners run and you cut losses short. If you buy a stock at 50 and it immediately drops to 45, some people will buy more, and some will be paralyzed and refuse to do anything until it gets back to 50 or better. The loss-cutter will accept that the purchase was a mistake and get out with a small loss rather than ride it down to 20. Setting a stop before you get caught up in the emotion of owning a losing position makes a lot of sense if this is your strategy, and it frees you from following the stock price all the time. When a stock shows a profit, most traders will protect some of that profit, or at least not let it turn into a loss, so they set a stop at or above their purchase price. Aggressive traders continually move their stop higher as the stock moves up, which puts them at risk of getting "stopped out" (order is executed) on a short-term pullback. Their hope obviously is that some big winners will cancel out their small losses.

Other traders aren't trying to hit home runs--they're going for singles. They might decide the probability is good that a stock will go up some amount in a reasonable time, and if they get that profit they'll be satisfied. They would enter a limit sell order to sell at their target price. If the stock goes far beyond their limit price then they look like idiots but they have achieved their objective.

On the buy side, some people like to buy into strength, hoping to catch a wave, or expecting a big move after a breakout. They would use stop buy orders to buy at the market when the stock trades at a specified price. The stop price would be set somewhere higher than the current price.

Other people like to buy weakness, thinking they're getting a bargain. They use limit buy orders to buy when the price drops to the specified point.

A stop order is unconditional on the sell or buy side. A stop limit order puts a condition on the order. A stop sell signal says "when stock trades at x, put in a limit order to sell at or above y". The idea is that if the stock falls drastically, it's likely to bounce back, so you want to monitor the situation instead of bailing out automatically. So if the stock is at 50 and your stop is at 45, you might put a limit at 40. If the stock gaps down to 30 then you're not automatically selling into the panic.

A stop limit buy order is the exact reverse. It's for people who want to buy into strength but don't want to chase a stock that's too overextended. For example, if Intel reports good earnings after the close, you decide you want to buy if the market reacts positively, but you don't want to pay a ridiculous price. You might enter a stop order at 21 with a limit of 22. That will save you from buying at the open at 25 and then seeing the price fall back all day. Of course if the stock opens at 22.01 and goes straight to 30 you will miss the buy and look like an idiot, but at least you will be a disciplined idiot.

Hope this helps.
Houyhnhnm

2007-08-24 19:24:02 · answer #1 · answered by Houyhnhnm 6 · 0 0

Limit orders are generally used to buy or sell stocks. On the sale side generally at a higher price than you paid or the stock is trading at. Also you put in a buy order when you see a stock that you feel would be a good buy say at $50 that is trading at $53 in hopes that it will dip to your number. The stop loss is to limit your potential losses. For example if you own a stock trading at $50 and you can only afford to take a $5 loss on it you put in a stop loss at $45 in case something happens to take it down below your $45 limit of loss. The only issue with a stop order is that sometimes when a stock drops dramatically, say something happens to your stock and it goes from $50 to $35 in premarket, you might not have enough shares bought at your stop loss to fill your order and even though you think you get $45 your order doesn't get filled. Stop limit orders tend to get those filled but it might be at a lower price..........sound complicated it is until you do it a lot.

2007-08-24 17:07:43 · answer #2 · answered by Anonymous · 0 0

Using your example, I would want a STOP order if I was afraid the market price would drop like a rock on a stock I owned. Say ... I go on vacation and would not be watching the stock market. A STOP order protects me from a dropping market while I am away.

On the other hand, If I want to purchase a stock, I want some control of the price I purchase it at. That is why I would use a LIMIT ORDER. Otherwise the stock could go thru the roof between the time I decide to purchase it and the time the order is completed. With electronic trading, this is less important than it used to be.

2007-08-24 17:06:00 · answer #3 · answered by Jeff H 5 · 0 0

check this link its good


http://buyingandsellingshares.blogspot.com/

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2007-08-27 03:35:28 · answer #4 · answered by Anonymous · 0 0

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