Stop-Loss vs Stop-Limit Orders

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 11, 2023

Are You Retirement Ready?

Orders are the real life savers to a person who has just entered into trading. With a market so volatile, placing an order manually can be difficult for traders and investors.

There are a few kinds of orders that can help them stay afloat during trading. Among those important orders, stop-loss and stop-limit stand out as the most popular ones.

But before we dive deep into the comparison, let us first have a definition of these two.

What Is a Stop-Loss Order?

For traders, every investment is a calculated risk wherein they invest their money for potentially profitable returns.

However, being uncertain about the market trend, sometimes even the best trader feels wrong about his decision of investing in a particular stock which may lead to heavy losses.

For this very reason, many traders place sell orders at prices that they would like their stocks sold if they made losses on their stocks instead of waiting for them to hit rock bottom and then selling them losing much more than expected.

At this juncture, stop-loss order acts as an insurance policy which minimizes your loss exponentially. You can also think of it as something that protects you from 'unnecessary' risks at times.

A stop-loss is basically an order which helps in transferring money from your account to offload it from an existing loss made with previous trades. It helps traders exit a particular investment at the time when its price goes below their risk appetite.

It's also called ‘'stop-loss market order.’’ The main advantage of this order is that it can limit your losses should there be any sudden changes in the market.

For instance, if you've created a sell stop-loss order for $10 on ABC shares, it will automatically convert into an actual sale as soon as the share price dips to $10 or below that.

Stop-loss orders are mostly used when you're expecting volatility to occur in your stock just before its time to close trades.

What Is a Stop-Limit Order?

It is another way through which you can protect your investments from tough market conditions, especially during volatile times.

This kind of trading order ensures that even if the change happens to go against you, you still remain protected to some extent by converting your profit into gains instead of letting them dissolve into thin air under different circumstances.

As soon as the market moves in either direction - up or down - and reaches your desired level, your buy/sell order triggers itself setting off a trade which is executed at the best possible price possible.

The stop-limit order differs from the stop loss in that it closes trades when they get to your preselected prices without cutting off significant profits.

This can be seen as more of a "take profit" option than limiting losses. Stop limits are used by beginners especially because they allow even novice traders to avoid any mistakes made due to lack of experience or knowledge of market movements.

Comparison Between Stop-Loss and Stop-Limit Orders

Both work great on their own but considering them both against each other, one must note that limit orders are for capping profits while stop limits prevent losses just like stop-losses do.

As you know already, limit orders are placed by traders to set off the trade at their preselected prices, but this kind of order is very different from a stop-limit order.

The biggest difference between them is that a limit order works only when the market price reaches your predetermined price level and automatically executes itself without waiting for a certain time.

On the other hand, stop-limit orders are used as a safety net especially during volatile times in which you want to transition gains into losses or protect profits from being reeled back.

When To Use Each One?

In most cases, it's ideal to use both kinds of trading orders together as per your requirements. However, if one is looking for advice on when to use each one then they should always go for using stop-limit order instead of the stop loss because it helps one to automatically lock in profits instead of letting them go.

The main difference between both orders is that stop-losses are used for protecting investments from any potential losses, but the stop-limits allow you to make your trades work like limit orders with an added protection against any unforeseen circumstances.

Final Thoughts

Now that you know what the differences between both kinds of trading orders are, it's time to decide which one best serves your requirements.

Most traders prefer using both stop-loss and stop-limit orders simultaneously because they can be used for taking profits or capping losses depending on the requirement of the trade.

They work like safety nets by transferring money from your account to protect you from any future downturns in prices while allowing you to make some profits out of them before exiting each trade.

The main difference between stop-loss and stop-limit order is that while the former limits potential losses, the latter helps in locking in profits whether there is a drastic change in market conditions during volatile.

It ultimately depends on your requirements and you should choose a trading order accordingly. If you don't know when to use either one, then both can be used in conjunction with each other to protect your investments from market fluctuations.

Lastly, it's always better to consult an expert if needed before using stop-loss or any other type of trading orders since they are quite complicated, especially for newcomers.

Stop-Loss vs Stop-Limit Orders FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

Discover Wealth Management Solutions Near You

Find Advisor Near You