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What Is the Difference Between a Limit & Stop When Selling?

Original post by Slav Fedorov of Demand Media

In addition to using market orders to sell stocks at current market prices, investors can also use limit and stop sell orders in specific situations. When used properly, limit and stop sell orders can help investors and traders maximize their profits while minimizing losses.

Limit Sell Order

In addition to using market orders to sell stocks at current market prices, investors can also use limit and stop sell orders in specific situations. When used properly, limit and stop sell orders can help investors and traders maximize their profits while minimizing losses.

How to Use Limit Sell Orders

Investors typically use limit sell orders to automatically take profits whenever a stock price reaches a specified level. This means that they do not have to watch the market in real time for fear of missing a profit. For example: An investor buys XYZ at $20 and decides that a 20 percent profit is reasonable, so he enters a limit sell order at $24. The order will only be executed if XYZ trades at $24 or higher.

Stop Sell Order

A stop sell order is an order to sell a stock if its price declines below a specified amount. It is always entered below the current market price. By placing a stop sell order, an investor is saying: sell the stock if the price declines below the level I specify. Sell stop orders are often called stop loss orders because they are used to limit stock losses (to stop them before they grow bigger) or to protect profits.

How to Use Stop Loss Orders

The rationale behind a stop loss order is that if a stock that is expected to advance declines instead, nobody knows how low it can go, so it’s best to cut your loss while it is small. For example: An investor buys XYZ at $20 expecting it to go up, but if, instead, the stock declines to $18, the investor would want to sell to avoid an even bigger loss, so he places a stop loss sell order at $18. If XYZ drops to $18, the stop loss will become a market order and will be executed at the next available price. If XYZ never declines to $18, the stock is never sold. An investor can continue to use stop loss orders to protect his paper profits. If XYZ advances to $24, the investor could move his stop loss up to $22, protecting his profit but keeping the stock for more potential gains.

                   

References

  • “PassTrak Series 7: General Securities Representative License Exam”; Dearborn Financial Services; 2003
  • “Stan Weinstein’s Secrets From Profiting in Bull and Bear Markets”; Stan Weinstein; 1988
  • “When to Sell. Inside Strategies for Stock Market Profits”; Justin Mamis and Robert Mamis; 1977

About the Author

Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.

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