If you think the price of the stock is going
to change, or if you want to limit potential losses or protect
profits, you can place a special order.
A
stop
order
instructs your broker to buy or sell once the stock
hits a target price, called the
stop
price.
The downside is that when the stop price is reached,
your order becomes a market order, to be executed at the market
price. That means the price may rise higher or fall further before
the trade is actually completed.
A
limit
order
instructs your broker to buy or sell a stock only
at a specific price, called the limit price. A limit order doesn't
become a market order, so you won't pay more or sell for less
than you want. But if a price changes quickly, your order may
not be acted on, even if the stock price was actually at the limit
for a time.
You might also give a
stop-limit
order,
instructing your broker to buy or sell when the
stock hits a stop price, but not to pay more or accept less than
the limit price. A stop-limit order can protect you against a
rapid price change, but you run the risk that your order won’t
be filled.
For example, if you give an order to buy
at "40 stop 43 limit," you might end up spending anywhere
from $40 to $43 a share to buy a stock, but not more than $43.
All in the timing
When you give a stop or limit
order, your broker will ask if you want a
good 'til
canceled (GTC)
or
day order.
A GTC stands until it
is filled, you cancel it, or the firm’s time
limit expires. A day order is canceled if it isn't
filled by the end of the trading day.
