I just opened an account on Vanguard and am learning about the different order types. I am having trouble finding the difference between a limit and stop order in a buying situation. Looking at their descriptions, I do not see a difference between those order types if I was making a buy order. Also, I don't see how a stop limit order is used in a buying situation either. Can someone explain that to me?
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You probably already know this, but just in case ... order types are only relevant to stock/etf trading within Vanguard Brokerage Services accounts. Regular Vanguard mutual fund accounts don't use order types.– dg99Commented Jan 28, 2015 at 23:09
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1 Answer
In a buying situation you would use a limit order if you wanted to buy as the price is falling during the day. For example, if the price is currently at $10.00 and you want to buy if the price drops to $9.50, you would put a limit order to buy at $9.50. If the price drops to $9.50 or lower your order will get executed at a price of $9.50 or lower. Depending on the size of your order and the size of the opposite sell orders you may be partially executed at various prices at $9.50 or lower. If the price hits $9.50 and then moves back up you may get only part of your order executed and the rest of your order will remain there until the price drops back to $9.50 or lower or you cancel the order. If the price does not go down to $9.50 your order will not get executed and will remain there until cancelled.
Regarding stop buy orders, there are two types, a stop buy order (which is simply a market order) and a Stop limit buy order. These stop buy orders are used when you want to buy as the price is going up.
For example you would use a stop buy order (market order) if the price is currently at $10.00 and you want to only buy if the price moves to $10.50 or above. As soon as the price hits $10.50 or above your order will be executed and you will be matched with what ever sell prices are currently in the market (if liquidity is low you may be filled by a market maker). So your order will be filled at any price around the $10.50 or higher. If the market gaps up to $11.00 at the open, you will get filled at or around that price.
If using a stop limit buy order, you would place you stop at say $10.50 and your limit at say $10.60. In this case your order will hit the market when the price hits $10.50 or above and you will get filled at any price of $10.60 or lower.
The stop limit buy orders are usually the safest and best type of buy orders to use if you are a breakout or trend investor/trader and want to catch the price as it moves higher, but avoid getting in if it gaps up too high so you lose your advantage at the price you are after.
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So in terms of a buying situation, a limit order will buy when it hits a value or lower and a stop order will buy when it hits a value or higher. Is that correct? It sounds like a stop limit buy order is a safe way to protect yourself if the price is increasing very rapidly when buying.– JustinCommented Jan 28, 2015 at 13:11
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@Justin - yes that's pretty much correct. I look to buy rising stocks in a rising market, so the stop limit buy orders are perfect for me. I but my orders in after market close for the next day, so if the stock gaps open to high I prefer to give it a miss and look for something else the next day. It ads a level of protection to your trading. You need to be patient as there are always other opportunities even if you miss the current one.– VictorCommented Jan 28, 2015 at 20:05