In this article, we break down the differences between two order types: limit orders and stop-loss / stop-buy orders.
Limit orders
Limit orders give you control over the price you buy and sell shares for, and are usually used to try to get a better deal than the current market price.
A limit buy order allows you to specify the exact price you want to buy shares for. Usually the price you want to pay is BELOW the current market price (because you want to buy low), but it can be a few percent higher than the current market price if you just want certainty over the price (see the order rules here).
A limit sell order allows you to specify the exact price you want to sell shares for. Usually you want to sell your shares for ABOVE the current market price (because you want to make a profit AKA sell high), but you can place a limit sell order for a few percent lower than the current market price if you just want certainty over the price (see the order rules here).
Notes:
Investors usually place limit orders to get a better deal and/or to control the buy/sell price
You only buy or sell the shares at the price you specify, or better
The full amount of your order is immediately deducted from your available balance until it's filled, you cancel it, or when it expires
Your order may not be filled if the market price doesn't reach your desired price (if your order expires, you won't be charged any brokerage fees)
Stop orders
Stop orders act as an insurance policy. They aren't about trying to get a good deal, they are about trying to reduce the amount you lose, or keep some profit. They usually work in almost the opposite way to limit orders.
Stop-buy orders: Allow you to buy shares at a higher price than they're currently trading for (AKA buy high). Investors usually place this type of order if they think the share price will continue to rise, so they're buying on the way up.
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Stop-loss orders: Allow you to sell shares for a lower price than they're currently trading at (AKA sell low). Investors place these orders if they think that the share price will continue to go lower and they want to sell their shares on the way down.
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Notes:
Stop orders act as an insurance policy - to reduce your losses or minimise the reduction of profits
You risk selling shares at their lowest price and buying shares at their highest price
You don't control the buy/sell price. Once the price you enter is hit, your stop order turns into a market order and you'll get the best available market price
The money for stop-buy orders isn't deducted from you available balance until your order is completed. It's your responsibility to keep enough money in your account to ensure your stop-buy order goes through if the price is met.
Your order may not be filled if the market price doesn't reach the price you entered (if your order expires, you won't be charged any brokerage fees)
🚨 Important: You're only allowed to have one pending sell order for each share you own (i.e. if you own 1 Apple share, you can only have one pending order to sell that 1 Apple share).