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After re-reading the descriptions same and again, I can't clearly say, what's the difference between STOP and LIMIT orders actually.

example: i.e. Stock price is at 5.60, and I want to trigger market (buy entry) order, when price will be 5.40 (as soon as possible).

I place STOP order:  BUY  at 5.40 
I place LIMIT order: BUY  at 5.40

?

I can't understand what will be the difference, as when price reaches 5.40, both of them should become market order and should execute asap.

  • You can't place a stop buy order below the current price, you use a buy limit order for that. You would use a stop buy order only if you want to buy above the current price - see my answer below. – Victor Jun 5 '18 at 13:33
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  • A "limit order" is like a normal bid or offer, e.g. "I want to buy 100 XYZ at $50.00 or less" or "I want to sell 100 XYZ at $51.00 or higher"

  • A "Stop order" or more precisely a "stop market order" is a market order that activates if certain market conditions are met, e.g. "If the stock trades at $49.00, I want to buy 100 XYZ at any price"

  • A "Stop limit order" is a limit order that activates if certain market conditions are met, e.g. "If the stock trades at $49.00, I want to buy 100 XYZ at $50.00 or less"

They all have their own risks and benefits. With limit orders, there might be a risk of missing out - other people in front of you could get executed at that price before you do, unless the stock goes below your limit price (if a buy). With market orders, there is a risk that you could end up buying for a much higher price than you expected (or selling for a much lower price than expected).

The professionals I know never use market or stop market orders. You can replicate the same effects using limit orders but with a higher limit price.

  • frankly speaking, I can't still make a difference, as it doesn't answer my question directly. (i understand the theoretical difference and theoretical explanation, but actually in real example, does it matter?) – T.Todua Jun 5 '18 at 13:16
  • One way to get more of a feel for how they work would be to try them out in a paper trading account – xirt Jun 5 '18 at 22:22
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If the price is at $5.60 and you want to buy if the price moves down to $5.40, then you would place a limit order at $5.40 - this means that you are prepared to buy at a maximum price of $5.40 or lower.

If instead you only want to buy if the price goes up to $5.80 or more, then you would place a stop buy market order at $5.80. This means that your order will hit the market when the price reaches $5.80 or above and be triggered at any price after that.

If you want your order to hit the market at $5.80 but only buy at a maximum of say $5.85, you would place a stop buy order at $5.80 with a limit at $5.85.

Why would you place an order to buy at above the current market price? Because you might be following some technical analysis trigger, example - a resistance line is just below $5.80 which has been hit on 3 occasions recently but not broken through. So you think to yourself that if the price breaks above this resistance it might move up strongly above it, so you only want to buy if the price hits $5.80 or above.

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The difference is in the direction. A limit buy order means "I want to buy at any price lower than X". A stop (often called stop-loss) buy order means "I want to buy when the price gets higher than X". A stop buy is most common when you have a short position that loses money as the price of the underlying rises. It's also possible to put it a stop buy if you want to catch a stock "on the rise". If you want to limit how much you lose, you put in a "stop loss" order that is executed when the price goes above the maximum amount of loss you want to absorb (in reality the trade will probably be executed at a price close to, but not exactly, your stop loss level).

For retail investors, it's more common to use stop sell orders, where you sell a stock that you own when the price goes below a certain threshold, to "stop your losses" at (or near) a certain amount.

In your example, a "stop buy" order would be executed immediately, since the price is already above the stop price. A limit order would accomplish what you want (execute at 5.40 or lower).

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    That is not true, many people use stop orders to enter trades, both long and short, including me. – Victor Jun 4 '18 at 21:30
  • @Victor true, I've softened that statement. – D Stanley Jun 5 '18 at 13:22

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