Pending Orders: Buy Limit Vs Buy Stop

Pending Orders: Buy Limit Vs Buy Stop

Securities trading can be a challenging process for complete beginners. While traders may choose the specific securities they would like to trade, anticipating the right price to enter into an ever-changing market is not an easy task to pull off. 

For this reason, most securities brokers offer a few different options for traders to place and execute their trades. Some are price sensitive and are only executed at a specific price, while others buy at the prevailing market price. 

Two common pending orders often used by stock and Forex traders when buying a particular security are “buy limit” and “buy stop” orders. While both involve a specific price point that needs to be reached for the order to be executed, there are a few key differences that make these pending orders suitable for different market scenarios. 

If you are a beginner trader and want to get acquainted with buy limit and buy stop orders on the market - this investfox beginner’s guide is for you. 

What Is A Buy Limit Order?

A buy limit is a type of pending order that is used to buy a financial instrument, such as a stock or currency pair, only at a specific price. 

For example, suppose XYZ stock is trading at $100 per share and a trader wants to buy the stock only once it reaches $95. In this case, they would set a limit buy order at $95 and wait for the stock to reach the desired price. 

If the stock price reaches $95, the order will be executed. If the price does not reach $95, the order will remain pending for its initial duration (until the end of the trading session, or until the trader manually cancels it). 

It is important to consider that limit orders have no guarantees of being executed, as the instrument might never reach the desired price point at all. This is one downside to using limit buy orders and requires traders to set limit prices at reasonable levels to ensure order execution. 

Another consideration is the practical aspect of using limit orders. When placing a limit order, the brokerage will lock the funds required for the execution of said order, as well as any commissions that apply to the trade. When opening positions of large sums, it is best to choose different limit prices with narrow intervals to make sure the desired number of shares are bought using the buy limit orders, as large trades can affect the price of stocks with subpar liquidity and price a portion of the pending order out of execution. 

What Is A Buy Stop Order?

A buy stop order is a type of pending order that instructs the broker to buy an instrument at the specified price or higher. For example, for a trader that wants to buy a stock that is trading at $100 and wants to buy when the price reaches $105 or higher, they can place a buy stop order and wait for the price to reach their desired target for the order to be executed. 

If the price does reach $105, the order will be executed and the broker will buy the predetermined number of shares at that price. If the price does not reach $105, the order will remain pending until it has been canceled. 

The idea behind buy stop orders is to take advantage of rising price momentum in an instrument and buy before it reaches its peak and sell before the trend reverses. However, it must be noted that such a trading strategy can be unreliable, and much like buy-limit orders, buy stop orders also have no guarantees of execution. Buy stop orders give traders the freedom to buy at their desired price without the need to constantly monitor the market, but they also come with a caveat, and beginner traders need to take this into account when placing orders. 

Buy Limit VS Buy Stop - Key Differences

Now that we have overviewed what buy limit and buy stop orders are individually, we can compare the two and identify the key differences between them to figure out how to get the most out of each. 

The key differences between buy limit and buy stop orders are:

  • Direction - Buy limit orders choose a limit price at which to buy the instrument and this price is fixed and non-negotiable. If the instrument does not reach the limit price, the order will not be executed. A buy stop order, on the other hand, chooses a specific price point and buys at that price, or higher - giving traders more room for error in their pending orders. This is to account for sudden momentum shifts in the price of a security to time the market and guarantee execution if the price reaches the desired target
  • Use - Buy limit orders are often used in accordance with valuation tools to buy the instrument at the most reasonable price and make the most out of price growth. Buy stop orders try to take advantage of upwards momentum by allowing a small margin of error on each pending order 

Knowing these key differences can help traders understand when to use buy limit and buy stop orders on the market. 

Key Takeaways From Buy Limit VS Buy Stop Pending Orders

  • Traders can choose between several pending orders when executing transactions on the market
  • Buy limit and buy stop orders are both types of pending orders that involve setting a specific price point at which the broker buys an instrument
  • A buy limit order is only executed if the price of an instrument reaches the limit point
  • A buy stop order is executed if the price of an instrument reaches the stop price or higher 
  • Neither of the two order types guarantees execution and will remain open until canceled 
  • Buy limit and buy stop orders are great tools for traders who use valuation techniques to pick buying prices to enter the market 

FAQs On Buy Limit Vs Buy Stop Pending Orders

What is a buy limit order?

A buy limit order is a type of pending order which is only executed once the price of an instrument reaches a predetermined point, at which the broker automatically files a buy order at that price level. 

What can I buy with a buy stop order?

A buy stop order is a type of pending order that can be used to automatically buy financial instruments, such as stocks and currencies, at a predefined price or higher. 

Are limit buy orders better than market orders?

Depending on your expectations regarding the price of an instrument, you may choose to place a limit order at a certain price or buy at the market price if you are especially confident that the price will rise.