When you buy and sell stock, you can choose the type of order you want to place. Two of these are stop orders and stop-limit orders. You use each of these under different circumstances to protect yourself from buying or selling at a price you don't like. Each of the two types of orders gives you a great deal of control, even in a volatile market.
How Limit Orders Work
You can use limit orders for either buying or selling a stock. If you enter a limit price to buy, you will get that price or lower if the order fills. If you enter a limit order to sell, you will get the price you name or higher if your order executes. Your order will remain open until the stock hits the price you name.
Limit Order Disadvantages
Prices can go zooming past your limit price before it can fill. That means you could miss out on your buying or selling opportunity. For example, if you have set a limit of $25 for buying a stock and prices move quickly up to $28 before your order can fill, you will miss out.
Similarly, if you set a limit of $20 for selling the stock, prices could drop so fast that your order never executes. For example, the stock could drop to $15 and you could be forced to lower your limit to $15 just to sell it. You would lose $5 per share in this case.
How Stop-Limit Orders Work
When you place a stop-limit order, you set two prices. The stop price is the one the stock must hit before your order becomes active. Once it becomes active, your limit price shows how much you're willing to pay to buy or how much you will take if you are selling. The people who execute your order at the stock exchange will not even look at it until the stock price has been hit.
Stop-Limit Order Advantages
If you use a stop-limit order to take profits, you wait until a stock rises to a certain price and then explain what price you will take from that point on. This lets you lock in profits. When you're selling, the purpose of the stop portion of the order is to trigger a sale if a stock hits a price that means you will lose money. The purpose of the limit portion of the order is to protect you from an extremely low price coming in once your order is active.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.