Question

Explain market orders, limit orders, and stop orders. How are they different from one another?

Answer 1

Meaning:

Market order:

This is one simplest order type used by the traders, where they can buy or sell the security at prevailing or current market price. To avoid any losses continues market observation is necessary. Through market orders one can get the best available price at specific point of time for particular security.

Limit orders:

Limit order carries the special feature where one can set the limit to execute the order. The order can be executed at this price or may be any best available price to the trader. Once the price reaches the limit trader will get notified so he may or may not execute the order to get best in his own interest. But there is no any guarantee to reach at the limit price also.

Stop order:

Stop order is also known as stop loss order. As the name suggests this order will help the trader to limit the loss. This order specifies the particular price set by the trader once the market price reaches that stop price the order will be executed automatically without notifying the trader.

For example if you have bought a share at Rs. 400 now the price of that share is Rs 500 and if you don’t want to lose that profit you can set stop order at last say Rs 480. So if price of particular share goes downside the order will be executed at Rs 480 and it will help to stop loss in this situation. But here if market price goes more than Rs.500 than trader can sell security at any favorable price.

Key difference:  

• Market orders are possible only in market hours but limit and stop orders can be set beyond market hours but will be executed only in market hours.
• Market order are more risky than other two orders as limit and stop order can help to set limit to execute the order.
• Limit order will notify the trader before executing the order but stop order will not notify as the situation given in above stop order explanation.
• Market orders are current orders but the limit order and stop order are for future.
• Market order cannot help the trader to stop or limit the loss but other two orders do help to limit the loss.
• In market order very quick decision is required but in limit order and stop order trader have some time to observe the market.