Hey everyone!

I'm pretty new to investing and trying to wrap my head around some trading concepts. Can someone explain the difference between a limit order and a stop order?

I’d love to understand when to use each one. Thanks in advance for any help! 

Limit Order

A limit order is an order to buy or sell a stock at a specific price or better. It gives you control over the price at which you enter or exit a trade.

For example, let’s say you want to buy shares of Company X, which is currently trading at $50. You think it might drop a bit before you buy, so you place a limit order at $48. If the price reaches $48 or lower, your order will be executed. If it doesn't, you won't buy the shares.

Stop Order

A stop order is a type of order that becomes a market order once the stock reaches a specified price, known as the stop price. It's commonly used to limit potential losses or protect existing profits by setting a safety net for a trade

• Sell-stop order: Placed below the current market price to limit losses on a stock you own. For example, if you own shares trading at $50 and set a sell-stop at $45, your shares will be sold if the price drops to $45 or below.
• Buy-stop order: Placed above the current market price to buy a stock once it shows upward momentum. For instance, if a stock is at $50 but you only want to buy it if it breaks above $55, you would place a buy-stop order with a $55 stop price.

When to Use Each

• Use a limit order when you want to buy or sell at a specific price and are okay with waiting for that price to be reached.
• Use a stop order to buy/sell a security once it shows signs of upward/downward momentum.