Stop Loss Order and Stop Limit Order are two different methods used in stock trading to avoid huge loss. Their names may sound very similar but they do have some differences. We are going to talk about Stop Loss Order first, then move on to Stop Limit Order.
What is a Stop Loss Order?
It’s also known as stop-market order, it is designed to trigger a position to sell in the next available price. Though it is mostly used for long term trading, penny stocks traders do use it as well. Why do we need it? Remember when you are trading in this market you cannot afford to stay away from your computer. We have discussed some of the reasons in our earliest articles, stop loss order and stop limit order are our best tools if we won’t have time to stay and watch the stock’s activity.
However, this method comes with its drawback. Let’s say you buy stock X at $40 and place a stop order at $38, but the price never drops at or bellow your stop order for the day. In the next morning it opens at 36 dollars, this is where your position would be sold. From this example you would lose more than you were expecting. This is just a scenario that may happen if you are unfortunate.
But, the expected result from a stop loss order would be to have your shares sold at the very next available price if it falls under the level you have set. You can never know how low a stock’s price will drop, it’s always in your best interest to sell and keep the remaining of your money.
What is a Stop Limit Order?
This method has a set limit on the price the shares should be sold at. It is more controllable than a stop loss order. As for the drawback we’ve seen in stop loss orders we don’t have that in stop limit orders.
Stop-limit orders are sometimes used because if the price of the stock or other security falls below the limit, then the investor does not want to sell and is willing to wait for the price to rise back to the limit price (Investopedia).
A stop-limit order comes in two flavors. It can either be an order to buy or sell a stock which put together the features of a stop order and a limit order. It might be a little complicated at first, but it is a very simple and easy tool to use. Once the stock’s price has reached the stop price, the stop-limit order becomes a limit order. This limit order will then be executed at a specified price (or better). The stop limit order is very beneficial since traders can manage their selling’s execution price.
Stop loss order and stop limit order are both important to us, but if you are in the penny stocks market stop limit order should be better for you. The more protection you have in this market the better off you are at making profits. Use them accordingly and you will be happy you did at the end of the day.