Question

4. What are the differences between a stop-loss order, a limit sell order, and a market order?

Answer 1

Let's say you are long 100 shares of a stock which you bought at $80 per share.

You are worried that the stock price could go down and you consider selling it. You look at the order book and it looks like this:

Qty Bid Qty    Ask

100    75.00 200 75.30

150 74.90 100 75.40

The best available price for your shares is 75.00 (Bid price - traders are willing to buy shares at this price) and it is the market price at which you can sell your shares.

Market order: If you place a market order to sell your shares, then it would get executed at 75.00 per share.

Limit sell order: If you do not like the market price, then you can place a limit sell order asking for a higher share price, say $75.20. If you look at the order book, there are traders who are willing to sell their shares at $75.30. If you place a limit sell order for 100 quantities, then your order would be placed higher than $75.30 order. This order may take some time to get executed or it may not get executed at all.

A stop-loss order: This type of order is to limit your loss. The current market sell price is $75.00. Now you can wait for the prices to go up but at the same time, you are worried that the price could go further down. In this case, you can place a stop-loss order. Maybe something like, if the price goes below $73 (trigger price), then place a market order to sell immediately.

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