What is the difference between a stop order and a stop limit order?

A stop order and a stop limit order are both tools used by traders to manage risk, but they differ in their execution and price control.

1. Stop Order:

• A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price (the "stop price").
• It is executed in the direction the price is moving, meaning if the market is falling, the stop order is triggered at the set price below the current market price, and if the market is rising, it is triggered at the set price above the current market price.
• Stop orders do not guarantee a specific execution price; they only guarantee that the trade will be executed at the stop price or better.

2. Stop Limit Order:

• A stop limit order is a combination of a stop order and a limit order. It combines the feature of a stop order, which triggers the trade at a specified price, with the feature of a limit order, which sets a specific price at which the trade will be executed.
• The stop limit order sets two price points: the stop price, which is the price at which the order becomes active, and the limit price, which is the price at which the trade will be executed if the stop price is reached.
• This type of order provides more control to the investor as it allows them to set both the maximum price they are willing to sell at and the minimum price they are willing to buy at.

3. Key Differences:

• The main difference between a stop order and a stop limit order is that a stop order guarantees execution at the stop price or better, while a stop limit order guarantees execution at the limit price or better.
• A stop order is more market-oriented, executing at the next available price, while a stop limit order is more precise, allowing for a specific limit price to be set.

In summary, a stop order is a simpler tool that triggers a trade at a specified price to limit losses or capture gains, while a stop limit order offers more control by specifying both a stop price and a limit price, ensuring the trade is executed at the investor's preferred price or better.