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What are limit orders and stop loss orders? How can I use them?

A limit order is an order to buy or sell a stock at a specific price. The order can be executed only at that price or a higher one. You can use this to avoid paying more than you intended when you buy - or accepting less than you planned when you sell.

Here's an example of the way you might use a limit order to protect yourself on the price:

Let's say you want to buy XYZ company stock. You see it's trading at $15 a share and determine that's a good price.

Now you tell your broker you want 200 shares, but you're willing to pay only up to $16 each for them.

These instructions mean your order will be carried out only within the price limit you've set. Setting a limit on the price, however, may mean your order will never be executed.

If you do not specify the type of order, it's assumed to be a market order.

The advantage of a market order is that it's more likely to be executed, since you haven't put price limits on it. However, you also can't be sure what the price will be. The price you pay when you buy or the price you receive if you are selling will be whatever the market price is at the time your order is executed. You could end up paying more than you expected, or being paid less you'd anticipated.

A stop loss order is an order to sell when the price of the stock drops to, or below, a stated price.

Stop loss orders can be used to protect your profit. Let's say the price on the stock that you bought at $15 a share is now $20, giving you a nice gain. You'd like to keep the stock because you think it might still go to $24, but you're also concerned about losing the profit that's yours if you sell now.

One solution is to give your broker a stop loss order. Tell your broker to sell if the price falls to, for example, $19. As soon as the stock trades at that price, your order will be executed.

This is not a guarantee you will actually receive $19. If the stock trades at $19, your order becomes a market order -- an order to sell your shares at the best available price.

You may receive $19 or close to it. But if the stock's price is falling quickly, you might only receive $18.50 or less.

We have been assuming you are using a sell stop order. But stop orders can also be used to buy a stock to protect a profit.

Let's suppose XYZ is currently trading at $20 and you have previously sold short XYZ stock at $25. That is, you borrowed XYZ stock through your broker and sold it in the market. When you are shorting a stock, you hope the price of the stock will decline so that you can buy it back at a cheaper price, thereby making a profit from the difference.

In the same way that you gave your broker a stop loss order to protect a profit on the XYZ stock you owned, a buy stop order can be used to protect the profit on your short sale. In this case, you will tell your broker to buy XYZ stock if it rises to, for example, $21. As soon as the stock trades at that price, your order will be executed, becoming a market order.