When you trade securities on the stock market, you usually do so at the spot price. In other words, the broker executes your orders at the prevailing market price when you place the order.

But in some cases, it can be convenient to place orders that execute at a time in the future, especially if you anticipate sharp price changes. This is where buy limit orders and stop loss orders come in. These orders are only executed when the price of an asset reaches certain levels.

A buy limit order is used when an investor wants to open a long position in a stock at a certain price, while a stop order is used by an investor who wants to lock in profits or limit losses by exiting a position. A stop order is also known as a stop loss order if it is being used to limit the amount of losses on a stock trade.

Buy Limit Orders

A buy limit order is an instruction to your brokerage to buy an asset, but only if the price is at or below a certain level. For example, if you expect the share price of XYZ Corp. to drop from $50 to $40, you might place a buy limit order at $42 in order to buy the dip.

It is important to note that if the stock never falls to the limit price, the order will not be filled. Moreover, if only a small number of shares are available at the limit price, the order may be only partially filled. Further, many investors place time limits on how long the limit order is in effect. Limit orders can be canceled automatically if not filled during a set time.

Further, many investors place time limits on how long the limit order is in effect. Limit orders can cancel automatically if not filled during a set time. used when an investor wants to open a long position in a stock at a certain price, while a stop order is used by an investor who wants to lock in profits or limit losses by exiting a position. A stop order is also known as a stop loss order if it is being used to limit the amount of losses on a stock trade. A stop order can be used to exit a long or short position in a security. It does not only apply to long positions.

Buy limit orders are not guaranteed to fill. If the stock never falls to the limit price, the order is not filled. Further, many investors place time limits on how long the limit order is in effect. Limit orders can cancel automatically if not filled during a set time.

Stop Loss Orders

A stop order is used by an investor who wants to lock in profits or limit losses by exiting a position. A stop order can be used to exit a long or short position in a security. It does not only apply to long positions.

A stop order is also known as a stop loss order if it is being used to limit the amount of losses on a stock trade. This is an order to sell a stock once the price falls to a specified price, known as the stop price. 

When the stop price is reached, a stop order becomes a market order. This is an important distinction since, once triggered, market orders can execute either close to the stop price, or possibly significantly below or above the strike price, especially when trading in extremely volatile market conditions.

This can help an investor who cannot monitor a stock position closely. A stop order may also take some of the emotion out of trading by allowing the investor to exit or enter a position automatically, once a stock reaches a certain price.

When a stop loss becomes a market order, it can result in a substantially worse fill. It's common for a stock to gap above or below the prior day’s close. Therefore, investors need to understand the risk associated with different order types.

The Bottom Line

Stop and limit orders offer a convenient way to automate future trades and avoid panic selling or buying. Rather than having to meticulously watch current price movements, the trader simply places an instruction to buy—or sell—a security when the price reaches certain conditions.