If you're new to investing, you may have come across the terms "stop-loss" and "limit order" and wondered what the difference is. Both are types of orders that can be placed with a broker when buying or selling securities, but they serve different purposes. A stop-loss order is designed to limit your losses on a security, while a limit order is used to buy or sell a security at a specific price. In this article, we'll take a closer look at each type of order and how they can be used in your investing strategy.
A stop-loss order is an order placed with a broker to buy or sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor's loss on a security position. For example, an investor who owns shares of XYZ stock at $100 per share may place a stop-loss order for $95 per share. This means that if the price of XYZ stock falls to $95 per share, the stop-loss order will be triggered, and the shares will be sold at $95 per share.
A limit order is an order to buy or sell a security at a specified price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. A limit order is not guaranteed to execute, but it does guarantee the specified price.
Which is better for you?
The main difference between a stop-loss and a limit order is that a stop-loss order is used to limit your losses, while a limit order is used to limit your potential profits. Both types of orders are important tools that can help you manage your risks and protect your investments. So, which one is better for you? It depends on your investment goals and your risk tolerance. If you're more concerned with protecting your capital, then a stop-loss order may be the better choice. On the other hand, if you're more interested in maximizing your profits, then a limit order may be the better option. Ultimately, it's up to you to decide which type of order best suits your needs.