Sometimes investors use stop-loss and limit orders with exchange traded funds to curb losses in their portfolio. However, it’s important to understand the difference between stop and limit orders.
With a stop order, the ETF will be sold when the price falls to a certain point. However, the stop order essentially becomes a market order and will be filled at the best price. Stop orders apparently caused some ETF investors to sell into the depths of the 2010 flash crash, although the SEC later cancelled these trades. [The Pro and Cons of ETFs]
A limit order, meanwhile, gives investors more control over their investment purchases and sales. The main benefit of a limit order is that the investor has total control over when, or what price, the ETF order will be filled. However, with all limit orders, the trade may not be executed if the stock or ETF does not reach the desired price. [5 Ways to Cut the Cost of Investing]
Consider using limit orders to manage losses. This will spell out the exact share price at which you want to sell. [The Art of the Sell]
Knowing when to sell your ETF shares is never an easy decision. However, one easy way to protect your ETF portfolio during a declining market is to use a limit order. [10 Tips for Trading ETFs]
“One disadvantage of the stop order is that the order is not guaranteed to be filled at the preferred price the investor states. Once the stop order has been triggered, it turns into a market order, which is filled at the best possible price. This price may be lower than the price specified by the stop order,” Investopedia reports.
“The primary advantage of a limit order is that it guarantees that the trade will be made at a particular price; however, your brokerage will probably charge a higher a commission for the limit order, and it’s possible that your order will not be executed at all if the limit price is not reached,” it adds.
Tisha Guerrero contributed to this article.