Question

1. How does a stop order differ from a limit order?

2.Exactly what does an investor expect from her broker when she places a stop limit
order with a stop price to buy at 50 and a limit price of 50.10? Why might an investor
place such an order?

Answer 1

A limit order refers to an order to execute a transaction at a specific price. For instance if the investor wants to purchase shares of a $200 stock at that price or lesser than that the investor can set a limit order that will be fulfilled only when the price specified becomes available.

A stop order on the other hand limits the losses and triggers the market order when the price reaches a designated point. The risk associated with a stop order is that it may not be executed at all. In stop orders the rate is always higher or lower than the current market price.

2: This is a stop-limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.

In this case the prder will be executed when the price falls between 50 and 50.10. The order is placed so as to avoid losses arising due to high purchase price.