Buy Limit Versus Buy Stop: Knowing the Basic Differences

1. Buy Limit Versus Buy Stop: Knowing the Basic Differences

2. The Stock Profit-Loss Dilemma: Where Buy Limit & Buy Stop Figure • Investing in stocks is one of the most common strategies to earn considerable margins of profit and sustain oneself even during economic or personal instabilities. • However, due to the potentially higher risks, many traders and investors avoid equities, instead choosing to invest in the ‘safer’ avenues such as long-term bonds and mutual funds. • And while these securities are also promising and well-yielding, a successful equity investment venture typically tends to yield higher returns than the other avenues. • Consequently, traders often attempt to come up with effective techniques to maximize the profits or at least minimize the losses involved in stock investments. Two such strategies involve buy limit and buy stop. Here are some basic differences between these two stock trading methods:

3. What are Buy Limits all About? • A buy limit order is a trade that is based on the limit price of the stock. To start with, the limit price is the minimum amount up to which the stock price must fall from the current price in order for the trader to purchase the same. • Thus, if the trader comes across shares that are undervalued and may increase in value in the long run, s/he may pass a buy limit order and purchase the stock at a price equivalent to or lower than the limit price. • Typically, a buy limit order is a profitable trading decision when the traders carry out an equity fundamental analysis and realize the hidden potential of certain shares. Thus, they may believe that although the share prices have dropped at the moment, they might elevate in the near future.

4. What to Know About Buy Stops • As opposed to a buy order, a buy stop is the stock trading strategy based on the stop prices of stocks. The stop price of a stock is the maximum amount up to which its price must rise above the current price for the trader to buy it. • While deciding what stocks to buy, a trader may try his/her best to purchase a stock whose price does not increase beyond the standard market price. However, despite having waited for a considerable amount of time, if the price of the stock continues to increase, the trader may pass a buy stop order. • Here, s/he may purchase a stock before or when it reaches the stop price set by the trader. For example, if the current price of a stock valued at Rs. 500 reaches the stop price of Rs. 600 and is predicted to increase further, the trader may purchase the stock immediately when (or even before) it reaches this stop price. • While a limit stop order is meant to increase the prospects of a profitable stock trading endeavour, a buy stop order attempts to minimize losses.

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