CFA CFA Level 1 Stop loss vs limit order

Stop loss vs limit order

  • This topic has 6 replies, 4 voices, and was last updated Jan-18 by RoyD.
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    • Renawxh
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      Hi! I do not quite see the distinct difference stop loss order and limit order. I know both are triggered only at a specified price. Can someone explain? Thanks!!!!!

    • ec_test
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      Totally looking forward to an answer. I don’t get this concept either…

    • ec_test
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      Ok, I went to look for an explanation in the CFAI book and this is actually clear. From the Equity and Fixed Income Book:

      A limit price places a limit on what trade prices will be acceptable to the trader.

      Limit buy order at $20 means buy stock at $20 or less. If stock price is greater than $20, the order won’t be executed.
      Limit sell order at $20 means sell stock at $20 or more. If stock price is less than $20, the order won’t be executed.

      Stop price indicates when an order can be filled.

      Stop buy order at $20 means buy stock once price is $20 or more, at less than $20, it won’t be executed.
      Stop sell order at $20 means sell stock once price is $20 or less, at more than $20, it won’t be executed.

      Limit buy – buy cheap
      Limit sell – sell expensive

      Stop buy – buy expensive
      Stop sell – sell for cheap

      Hope it helps, it definitely helped me!

    • RoyD
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      Ok both of these are related to setting the trigger price to buy or sell. It’s difficult for me to explain but for me the difference is perhaps with the intentions here.
      With a Limit Order you want to buy or sell a security but want to limit the price at which it is done. For example a stock is trading at $50 and I expect it to go to $55 and I’m looking to make a profit of $4. I’d place a buy order with a limit of probably $51 because I wouldn’t make my $4 profit if the order got executed at $52 or higher. Basically a limit order is the maximum price you would pay to buy a stock and vice versa if you wanted to sell.
      With a Stop Loss you don’t really want to buy or sell but actually want to protect yourself from loss. There are two types of Stop Loss orders. 1) Stop Sell 2) Stop Buy.
      You set a Stop Sell order at a minimum price beyond which you wouldn’t want to hold a security. Say for example you purchased a stock at $50. Say you want to limit your loss to $5 then you would set the Stop Sell order at $45.
      Stop Buy is if you’re in a short position or waiting for the price of a stock to go up just to confirm your expectation that the stock is going to rise.

      Hope you understood this. Feel free to ask questions if you didn’t. Best way to revise is to teach :stuck_out_tongue: 

    • wm247
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      Based on my experiences on trading stocks and forex, I know that stop order is more commonly known as Stop Loss order. Limit order I understand, but I really have difficulties to convey it here. 🙁

    • Renawxh
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      @ec_cfatest‌   @RoyD‌  hey thanks guys! I definitely had a better idea combining both of your explanation. Woohoo.! Cheers!

    • RoyD
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      oh yeah I forgot the main difference. Limit Order is a kind of Execution Instruction which states how to buy/sell. Stop Loss order is a Validation Instruction which states when to buy/sell.

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