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What is the difference between a limit and stop order?

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Quick Answer

A limit order is an order to buy or sell a stock at a stated or a better price, while a stop order is an order to buy or sell a stock when it reaches a specified or stop price, according to the U.S. Securities and Exchange Commission. Investors use limit orders to execute orders at predetermined prices and stop orders to protect profits or limit losses.

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Full Answer

Buy limit orders enable investors to buy stocks at specified or lower prices, while sell limit orders enable them to sell stocks at stated or higher prices, as the U.S. Securities and Exchange Commission explains. Brokers can only execute a limit order when the market price of the stock reaches the limit price. Although brokers may not execute the order at the limit price, limit orders allow investors to trade at the prices they desire.

Brokers execute buy stop orders at specified prices above the current market price and sell stop orders at stated prices below the current market price, as the U.S. Securities and Exchange Commission details. If the price of a stock rises above or falls below a loss making level, a stop order closes the order and protects the investor from additional losses.

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