Stock market lingo is one of the first things you need to learn to be a successful trader. Two of the terms you should know are a stop-on-quote order and a stop-limit-on-quote order. What do stop-on-quote and stop-limit-on-quote orders mean?
A stop-on-quote order is an order to buy or sell a security when its price exceeds a certain point, so it will lock your profit or limit your loss. A stop-limit-on-quote order is an order that combines the features of a stop-on-quote order with that of a limit order.
A stop-on-quote order triggers a market order as soon as the price reaches a certain point. Meanwhile, the activation of the stop-limit-on-quote happens when it hits a defined price point.
Read on to learn more about stop-on-quote vs stop-limit-on-quote orders and how you can use them in stock market trading.
Stop-On-Quote Order and Stop-Limit-On-Quote Explained
The term stop-on-quote order refers to buying or selling security as soon as its price exceeds a certain point. Using this order, you can lock the profit and limit the loss. The stop-limit-on-quote is a type of order that combines the features of the stop-on-quote order with that of the stop-limit order.
The primary difference between the two is that the stop order activates a market order when the stock’s price reaches a certain point, while the stop limit is a limit order triggered when a specified price point is reached.
An investor can get downside protection through the stop-limit-on-quote in selling a stock at his lowest price so that there’s no sale exposure causing the market to panic.
The examples below will better explain these concepts:
Examples for Both Concepts
Stop-On-Quote Order
You have quoted a price, and the market wants to buy the stock only if it crosses that value. If the price is at 20.00 and you set a limit of 19.82, you can execute the sale only if the price drops to 19.82.
Stop-Limit-On-Quote Order
You have quoted your price, and when the market hits that price, they will turn your order into a market order. However, your buy/sell price may vary if the spread is high.
Changing of the Names
In the past, stock market traders do not use the terms stop-on-quote (Etrade) order and stop-limit-on-quote when they conduct these types of trading. It was only on Jan. 21, 2013, when the Financial Industry Regulatory Authority or FINRA used these terms.
Now, investors use these terms to either limit their loss or protect their gain on security. FINRA also described these terms along with the name change, including the events that could trigger them.
The description of the new name and their triggering events are as follows:
Stop-On-Quote Order
The previous order name of Stop-On-Quote Order was Stop Order. Traders place the Stop-On-Quote order at a stop price that is less than the current market price. Thus, its activation is when the national best bid quote is at or less than the designated stop price.
Traders place a buy Stop-On-Quote order at a stop price that is higher than the current market price. Its trigger is when the national best offer quote is at or more than the designated stop price.
Then, converting the Stop-On-Quote (Etrade) order into a market order happens (either buy or sell), and its execution prices can differ considerably from the designated stop price.
Stop-Limit-On-Quote Order
The previous order name of Stop-Limit-On-Quote Order was Stop Limit Order. A Stop-Limit-On-Quote order combines the elements of a Stop on Quote order and a limit order. Traders place this at a stop price that is less than the current market price. Again, this order happens when the national best bid quote is at or less than the designated stop price.
Traders place a buy Stop-Limit-On-Quote order at a stop price that is higher than the current market prices. This happens when the national best offer quote is at or more than the designated stop price.
Once triggered, a Stop-Limit-On-Quote (Etrade) order transforms into a limit order (either buy or sell) at a designated limit price. Its execution may not happen as the market price can veer away from the designated limit price.
Stop-On-Quote vs Stop-Limit-On-Quote
There are different types of orders in stock trading that allow you to specify how your broker can trade your stocks. When you place a stop order or limit order, you tell your broker that you are not after the market price. The market price is the current price of a stock.
By placing a limit order or stop order, you tell your broker that you want to execute your order as soon as the stock price is the same as the price you have specified instead of its current market price. In this regard, you need to know the stop-on-quote vs. stop-limit-on-quote differences.
Differences Between Stop-on-quote orders and Stop-limit-on-quote:
- Limit order uses a price to specify the least acceptable amount for a transaction. On the other hand, traders use a stop order to trigger an actual order. This is as soon they see that the designated price is reached.
- Another difference is that the market can witness limit order, while traders can’t see the stop order until triggered.
An example will help you understand the concept more. Suppose you want to buy a $70 stock and $69 per share. By specifying the amount, you have shown the market your limit order. Execution will happen when sellers are willing to meet that price.
On the other hand, the market will not see a stop order. Traders can only see it when the stop price is met or exceeded.
In a typical stop order where the price triggers the stop, the execution of a market order happens. If the order type is a stop-limit, it will result in a conditional placement of a limit order on the stop price being triggered. So, a stop-limit order requires both the limit price as well as the stop price. They may not be the same.
What Is a Stop-On-Quote Etrade Order?
This is a common question for Etrade users – what is a stop-on-quote Etrade order? There are different types of Stop-On-Quote orders. They are all conditional because they depend on a price that is not yet available when the order is first placed in the market. Once the price is available, it will trigger a stop order. However, the broker will execute the order differs depending on the type.
When Do Brokers Use Stop-on-quote Orders?
Many brokers are currently using Stop-On-Quote orders to clarify that their stop orders will only happen once the valid quoted market price has been met. For instance, if a broker sets a stop order with a stop price of $50, it will only be triggered once a valid quote at $50 or higher is met.
Once a stop price is met or exceeded, the typical stop order will change into a standard market order. But a stop order can also be given as an entry order. If an investor wants to open a position when a stock’s price rises, they could place a stop market order set over the current market price, turning it into a standard market order when the stop price is met.
Stop Orders Are Simpler than Stop Limit Orders
Stop orders are simpler than stop limit orders. A buy stop is higher than the current market price, while a sell stop order is lower than the current market price. Stop orders may cause stock traders to get in or out of the market.
Stop orders avoid the risks of partial fills or no fills. However, since it is a market order, investors may have their order filled at a much lower price than expected. For instance, a stop order is set at $60 on a stock that is bought at $65 per share.
The company reported its earnings after closing the market and opens the following day at $50 per share after upsetting its investors. A stop order will be activated, and the investor could be out of the trade at $50, which is lower than the stop price of $60.
There are also risks associated with stop orders since there is no price that is guaranteed. When a buy stop order is triggered, it will transmit a market order. The investor will have to pay the prevailing market price when received.
When a sell stop order is triggered, it will also transmit a market order. The investor has to pay the prevailing bid or quoted price in the market when received.
What Is a Stop-Limit-On-Quote Etrade Order?
This is a common question for Etrade users – what is a stop-on-quote Etrade order? There are two components of a Stop-Limit-On-Quote order:
- A stop price
- A limit price.
A Stop-Limit-On-Quote order can trigger a limit order to sell or buy a security when a specified stop price has been met.
For instance, you bought some shares at $50, expecting the stock price to rise. You can place a Stop-Limit-On-Quote (Etrade) order to sell the shares if your forecast turns out to be incorrect. If you set the stop price at $40 and the limit price at $40.50, you can trigger the stop limit order once the stock trades at $40 or less.
But a limit order will only be filled when the limit price you chose is available in the market. If the stock price drops to $39 per share, it will not be filled instantly since no buyers are willing to buy your shares at your limit price of $40.50 per share. In this case, the stop price and the limit price are the same.
Basic Risks Associated with Stop Limit Orders
There are two basic risks associated with stop limit orders:
- Partial fills
- No fills
The stop price may be triggered, and the limit price is unavailable. However, you can’t close a trade if you use a stop limit order to prevent loss to get out of a long position once the stock price starts dropping.
Even if the limit price is already available after triggering a stop price, executing an entire order may not happen if the liquidity is not enough at that price. For instance, if you want to sell 400 shares at a limit price of $65, but only 250 shares were filled, you may experience additional losses on the 150 remaining shares.
Stop-limit-on-quote Orders Are More Complicated than Stop-on-quote Orders
Stop-Limit-On-Quote orders are a bit more complicated than Stop-On-Quote orders. You have to set up two prices, namely a stop price and a limit price. Once a stop price is triggered, a limit order is delivered to the stock exchange.
The limit order will start working at or more than the limit price that you have set. With stop-limit orders, stock traders get the order at the price they have indicated or better.
A sell stop limit order is lower than the current market price. Once the stop price is triggered, the limit order is delivered to the stock exchange. A sell limit order will not start working at or more than the price that you set.
A buy stop limit order is placed higher than the market price. When a stop price is triggered, the limit order is delivered to the stock exchanges, and a buy limit order will start to work at or less than the price you set.
What Is a Limit Order?
Since a Stop-Limit-On-Quote Order involves a limit order, you should also know what it means. A limit order is a type of order to sell or buy a stock for a specified price.
For instance, if you want to buy shares of a $50 stock at $50 or less, execution won’t happen unless the specified price becomes available. But you can’t set a limit order to buy a stock higher than the current market price just because a better price is already available.
Likewise, you can set a limit order to sell a stock as soon as a specified price is available. For instance, you own stocks worth $65 per share. You want to sell them if the price rises to $70 per share.
Execution will only happen once you reached the same price or higher than $70. It is impossible to set a limit order to sell lower than the current market price because higher prices are available.
Conclusion: Stop On Quote Order and Stop Limit On Quote Explained
A “stop on quote” order means a type of order that buys or sells security when its prices exceed a certain point. Traders use this order to lock the profit or limit the loss. A “stop-limit on quote” order is an order that combines the features of a limit order with that of a stop-on-quote order.
