Computer Science vs. Computer Engineering: What's the Difference?

Computer Science vs. Computer Engineering: What’s the Difference?

Many colleges and universities use the terms “computer science” and “computer engineering” to describe computing programs interchangeably. But, there are several differences that make these two fields unique.

Here’s what future students need to know about each of these popular college majors, and what may make one more desirable over the other for their future goals.

What Is Computer Science?

Those working in computer science focus mainly on computing theory, programming, algorithms, and models to develop software or computer systems that people utilize around the globe. A computer science degree can cover topics like design and analysis of algorithms, data analysis, an introduction to operating systems and different programming languages. Computer scientists generally focus on software and are typically the ones to create algorithms that make programs like artificial intelligence, machine learning, cloud computing, and even video games work.

Recommended: Is a Computer Science (CS) Degree Worth It?

What Is Computer Engineering?

Computer engineers generally focus on creating, testing, and evaluating the technology for hardware and software interfaces. A computer engineering degree can cover topics like computer architecture, computer networks, and physics. It is a computer engineer’s job to develop new processors, microchips, and other components that physically go into computers and smartphones to make them work each and every time someone clicks the “on” button. This field may often require a combination of electrical engineering skills and computer science knowledge.

Similarities and Differences Between Computer Science and Computer Engineering

Again, computer science and computer engineering are two distinct areas of study and work, however, there are similarities between the two. The obvious ones first: Both professions use and work with computers, both work with data and math, and both work to advance the field of computing. Because of these similarities, both areas of study could share prerequisites and coursework at your chosen college or university (link prerequisite math and research classes).

Both degrees are also to thank for your ability to read this very story on your laptop, tablet, or phone, so if you’re the type of person who wants to further improve the internet and computer experience, either field could be a good option for you.

Computer Science vs. Computer Engineering Job Outlook

Individuals with a computer science or computer engineering degree may be qualified for a variety of job specialties. Here’s some information on common jobs that these areas of study may prepare you for.

Computer Science Job Outlook

There’s some good news for those looking at becoming computer scientists in the near future. According to the Bureau of Labor Statistics, the employment of computer and information research scientists is projected to grow 15% from 2019 to 2029. The bureau added, that rate is “much faster” than the average rate for all occupations. Perhaps most encouraging of all, the bureau noted, for this field “job prospects are expected to be excellent.”

As the Bureau of Labor Statistics further explained, in May 2020 the median annual wage for computer and information research scientists was $126,830. However, the typical entry-level education is a master’s degree, according to the government agency, meaning you may need to consider going for a few more years of education than you have originally anticipated.

The demand for software developers is expected to grow by 22% from 2019 -2029, with a median salary of $110,140.

It’s also important to note that those working in computer science may see different job titles pop up on their job search. These titles can include (but are not limited to), software developer, database administrator, web developer, or project manager. It can even include job titles like full-stack developer, engineering manager, user interface designer, information security analyst, information technology specialist, mobile application designer or developer, and more.

Computer Engineering Job Outlook

On the flip side, the Bureau of Labor Statistics explained that computer hardware engineers’ employment rate is projected to grow much more slowly over the same timeframe. It is estimated from 2019-2029 the job market for computer hardware engineers would grow just 2%, marking a slower growth rate than the average occupation.

The positive? The average salary for computer hardware engineers is still comparatively high, sitting at a comfortable $119,560 in May 2020. And, its typical entry-level education is a bachelor’s degree, meaning students could forgo the extra education, save on college tuition, and enter the job market even sooner than their computer science counterparts.

As computer scientists, those with a computer engineering degree could qualify for roles under a variety of job titles. Those titles include (but again are not limited to) telecommunications engineer, computer architect, communication engineer, network systems engineer, systems architect, and simply, computer engineer.

Recommended: Return on Education for Bachelor’s Degrees

Computer Science vs. Computer Engineering–Which One Is Better?

The question of “which is better, computer science or computer engineering?” really comes down to personal choice. To make this decision for yourself, it may be a good idea to consider what your dream computing job looks like.

Computer scientists can typically specialize in the following areas:

• Artificial Intelligence

• Human-Computer Interaction

• Software Engineering

• Mobile and Web Computing

• Game Design

• Computer Graphics

• Data Science

• Programming languages

Computer engineers can typically specialize in the following areas:

• Hardware systems

• Robotics and Cybernetics

• Computer and Network Security

• Distributed Computing

• Embedded Systems

As you can see, while the specialties can be considered related under the computing field, both computer science and computer engineering come with unique and exciting specialty areas. All that matters is you pick the one that is the most interesting to you, and that’s how you can answer the age-old (or at least since the dawn of the computer age) question, “Which one is better?”

The First Step to Becoming A Computer Scientist or Computer Engineer

While one career path does have a slight advantage due to a better job growth outlook, both come with strong possibilities for a varied, lengthy, and well-paid career. Both also come with the prerequisite of college, or potentially even a Master’s program. After choosing a school and a program that’s right for you, it’s time to get your financial ducks in a row to pay for the education that could lead to your dream job.

On your journey of college financial planning, would-be students can and should look into all their options including scholarships, financial aid, and private student loans. If the last one sounds like a good option for you, consider adding SoFi’s private student loans to your consideration list.

In the interest of full transparency, private student loans should be looked at as an option only after applying for federal student aid. Federal student loans, grants, scholarships, or work-study should be pursued first. That’s because private student loans may lack the borrower benefits and protections available to federal students, such as deferment or forbearance during periods of financial difficulty.

Students, and potentially a cosigner, are able to apply for a private student loan with SoFi in just minutes. Options include loans for both undergraduate and graduate school.

The Takeaway

Many colleges use the terms “computer science” and “computer engineering” to describe computing programs interchangeably. While there is some overlap, these are two distinct fields of study with their own specialties and their own merits. Both computer science and computer engineering have high median salaries, topping six figures each. However, the job outlook for those with computer science degrees is a bit better, with a projected 15% growth between 2019 to 2029. To find out which path is right for you, see the specialties under each field of study and figure out what peaks your interest most.

Looking for options to pay for your studies? Review options available with a SoFi private student loan.

Photo credit: iStock/SeventyFour


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Are Scholarships Taxable?

Are Scholarships Taxable?

Scholarships may count as income depending on how funds are received and spent, meaning that they could be taxable.

Usually, scholarships don’t have to be repaid like student loans, though they may carry requirements for continued funding, such as a minimum GPA or competing on a collegiate sports team.

According to Sallie Mae’s How America Pays For College 2020 report, scholarships and grants covered 25% of education costs on average.

But does this free money for college come with any other caveats? It depends.

If you or your student received scholarship funding, it can be helpful to know ahead if it will contribute to your tax liability. Here’s what you need to know about identifying taxable scholarships and handling filing requirements.

Scholarships That Are Tax-Free

For many students, the scholarships they receive are tax-free. But in some cases, all or a portion of a student’s funding may be taxable.

Students can be exempt from paying taxes on their scholarships if they satisfy certain criteria. For one, they must be enrolled at an accredited college, university, or educational institution that maintains regular attendance.

Additionally, scholarship funds must be used to pay for qualified education expenses—a determination made by the IRS. Under this definition, qualified education expenses include the following:

• Tuition

• Mandatory fees (e.g., athletic and tech fees)

• Textbooks

• Equipment and supplies (e.g., lab equipment)

When it comes to textbooks, equipment, and supplies, anything that is required by your school to complete coursework would be free from taxes. If you use the funding towards an extra-curricular activity, such as a club or intramural sport, they are taxable.

If the scholarship is used for a certificate or non-degree program, the entire amount is taxable whether or not funds are used for qualified education expenses.

It’s important to note that any scholarship funds leftover after paying for qualified education expenses would not be tax-exempt.

Recommended: How to Pay for College Textbooks 

Scholarships Considered Taxable Income

How are scholarships taxable? According to the IRS, scholarships used for expenses outside the scope of qualified education expenses must be reported in gross income—making them taxable.

Scholarship funds used for the following costs are considered taxable by the IRS:

• Room and board

• Travel

• Medical expenses

• Optional equipment (e.g., new computer)

But are scholarships taxable income in any other situations?

Scholarships that are awarded in exchange for services like teaching or research, often known as fellowships, are classified as taxable compensation in most cases. Students would have to pay taxes even if their fellowship money is used to pay for tuition and other qualified education expenses.

However, there are a few exceptions when education-related payments could be tax-exempt. Specifically, students do not have to pay taxes on funds received for required services through the following scholarship programs:

• National Health Service Corps Scholarship Program

• Armed Forces Health Professions Scholarship and Financial Assistance Program

• Student work-learning-service programs operated by a work college

Other forms of financial aid could be considered taxable income as well.

Earnings through the Federal Work-Study program are subject to federal and state payroll taxes. If you stay below 20 hours a week while enrolled full-time, you won’t have to pay FICA (taxes for Medicare and Social Security) taxes.

Even Pell Grants—a federal aid program for students with significant financial need—are taxable if they’re not used for qualified education expenses.

Making it Legal: Reporting Taxable Awards

If a college scholarship is considered taxable, the student would need to report the scholarship (or portion of the scholarship) on their tax return.

Some students may receive a W-2 form from the scholarship provider outlining the taxable amount. Otherwise, they may need to calculate and enter the amount on their own tax return.

There are three IRS forms to report taxable scholarships. Choose the following form that best fits your personal situation.

• Individual Income Tax Return: Form 1040

• Tax Return for Seniors: Form 1040-SR

• U.S. Nonresident Alien Income Tax Return: Form 1040-NR

Students filing either Form 1040 or Form 1040-SR can add the taxable portion of their scholarship to the total amount on the “wages, salaries, tips” line. If this was not recorded on your W-2, IRS instructions say to enter “SCH” with the taxable amount in the space to the left of the “wages, salaries, tips” line.

International students using Form 1040-NR simply report the taxable amount on the scholarship and fellowship grants line.

While students may be enjoying their newfound freedom at school, when it comes to taxes, they may need some assistance. This is an opportune time for parents of college students to offer guidance and support as needed. If you have outstanding questions about if any portion of your scholarships are tax-deductible, consider consulting with a tax professional for personalized guidance.

How Education Tax Credits Fit in

Students and their family members may be eligible to claim the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) if they paid for college and related costs in the past year. Take note that you can’t use both tax credits for the same student in the same year.

To claim either tax credit, you’ll need Form 1098-T from your college. This form shows any reportable transaction for an enrolled student.

To qualify for the AOTC or LLC, you could have paid educational expenses out of pocket or with student loans. Expenses that were paid for by tax-free scholarships are not eligible for a tax credit.

The AOTC and LLC differ in scope and eligibility, so it’s helpful to compare both to see which may apply and provide a greater tax return.

American Opportunity Tax Credit (AOTC)

The AOTC can be used for qualified education expenses—tuition, fees, textbooks, and necessary supplies—for a student’s first four years of college.

The maximum credit currently stands at $2,500 a year for eligible students. This is calculated as 100% of the first $2,000 in qualified education expenses paid for an eligible student plus 25% of the next $2,000 in qualified education expenses.

If the AOTC reduces your taxes to zero, it’s possible to have 40% of the remaining credit (up to $1,000) refunded.

Eligibility for the AOTC is based on the tax filer’s modified adjusted gross income (MAGI). If you’re filing separately, your MAGI must be $80,000 or less to qualify for the full AOTC credit. The threshold is $160,000 for married filing jointly.

It’s possible to receive a reduced AOTC amount if filing separately with MAGI between $80,000 and $90,000 or $160,000 and $180,000 for married filing jointly.

The Lifetime Learning Credit (LLC)

The LLC can apply to a broader range of expenses than the AOTC. It can be used to claim up to $2,000 for tuition and related educational expenses for undergraduate, graduate, or professional degree courses. Costs of non-degree programs that improve job skills are also eligible for the LLC.

This credit does not have a limit on the number of years it can be claimed on your tax return. However, the LLC has stricter income requirements.

For Tax Year 2020, your MAGI must be below $69,000 (or $138,000 if filing jointly) to claim the LLC. Anyone with a MAGI between $59,000 and $69,000 (or $118,000 and $138,000 filing jointly) would only be eligible for a gradually reduced credit.

Don’t Forget Deductions

If you’re paying interest on a student loan, you may be eligible to deduct up to $2,500 with the student loan interest deduction. To be eligible, interest payments must be legally obligated and your filing status can’t be married filing separately.

There are also income requirements, which can vary annually, to factor in for the deduction calculation. For the tax year 2020, the filer’s MAGI must be less than $70,000 (or $140,000 if filing jointly) to be eligible for the full $2,500 deduction.

If your MAGI is between $70,000 and $85,000 (or $140,000 and $170,000 if filing jointly), you could qualify for a reduced deduction.

Recommended: Can You Deduct Your Child’s Tuition from Taxes?

The Takeaway

Saving for your child’s college tuition can be challenging.

Scholarships, grants, and fellowships are helpful ways to make college more affordable. But in many cases, students and families are still left with some education costs to cover.

Parents have some options at their disposal to help pay for their child’s education. If you haven’t saved enough, you may consider using retirement funds to pay for tuition and room and board, though this could result in penalties or fees.

Students can apply for federal student aid by filling out the Free Application for Federal Student Aid (FAFSA®), annually. This allows them to apply for scholarships, grants, work-study, and federal student loans.

If those funding sources aren’t enough, another avenue to consider may be private student loans. Private student loans don’t always offer the benefits that are afforded to federal student loans, such as deferment or forbearance.

Private lenders may not offer the same benefits as federal loans, including income-driven repayment and loan forbearance, so they are generally considered only after all other options have been reviewed. However, borrowers with strong credit may qualify for a competitive interest rate.

If you’re considering a private student loan, SoFi can help. With SoFi, borrowers can choose from four repayment plans and there are no hidden fees.

Find your rate with just a few clicks.

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What Are Emerging Markets?

Emerging markets or emerging market economies (EMEs) are in the process of achieving the building blocks of developed nations: they’re establishing regulatory bodies, creating infrastructure, fostering political stability, and supporting mature financial markets. But many emerging markets still face challenges that developed market countries have overcome — contributing to potential instability.

To further answer the question, “What are emerging markets?”, it helps to understand developed markets.

Developed economies have higher standards of living and per-capita income, strong infrastructure, stable political systems, and mature capital markets. The U.S., Europe, U.K, and Japan are among the biggest developed nations.

Because these economies wield so much power globally, many internationally focused investors don’t realize that in fact emerging markets make up the majority of the global economy.

India, China, and Russia are a few of the larger countries that fall into the emerging markets category. Some emerging market economies, like these three, are also key global players — and investors may benefit by understanding the opportunities emerging markets present.

What Are Emerging Markets?

In essence, an emerging market refers to an economy that can become a developed, advanced economy soon. And because an emerging market may be a rapidly growing one, it may offer investment potential in certain sectors.

Investors tend to see these countries as potential sources of growth because their economies can resemble an established yet still-young startup company. The infrastructure and blueprint for success have been laid out, but things need to evolve before the economy can truly take off and ultimately mature. At the same time, owing to the challenges emerging market economies often face, there are also potential risks when investing in emerging markets.

Investors might bear the brunt of political turmoil, local infrastructure hurdles, a volatile home currency and illiquid capital markets (if certain enterprises are state-run or otherwise privately held, for example).

Emerging Market Examples

What constitutes an emerging market economy is somewhat fluid, and the list can vary depending on the source. Morgan Stanley Capital International (MSCI) classifies 27 countries as emerging; Dow Jones classifies 22 as emerging. There is some overlap between lists, and some countries may be added or removed as their status changes. Greece, for example, is no longer considered a developed market but an emerging one.

China and India are two of the world’s biggest emerging economies, and historically they were included in the BRIC grouping of developing nations, along with Brazil and Russia. Increasingly, though, investors see China and India as pushing the bounds of their emerging market status.

China

China is the second-largest economy globally by gross domestic product (GDP). It has a large manufacturing base, plenty of technological innovation, and the largest population of any country in the world.

Yet China still has a few characteristics typical of an emerging market. For example, the gross national income per capita falls below the threshold established by the World Bank for a developed country: about $10,000 per year versus the higher standard of about $12,000 per year. With its Communist-led political system, China has embraced many aspects of capitalism in its economy but investors may experience some turbulence related to government laws and policy changes. Last, the Renminbi, China’s official currency, has a history of volatility.

India

India is another big global economy, and it’s considered among the top 10 richest countries in the world, yet India still has a low per-capita income that is typical of an emerging market and poverty is widespread.

At the same time, India was ranked near China as being among the more advanced emerging markets, thanks to its robust financial system, growing foreign investment, and strong industrials, especially in telecommunication and technology.

Characteristics of an Emerging Market Economy

As noted above, there isn’t a single definition of an emerging market, but there are some markers that distinguish these economies from developed nations.

Fast-Paced Growth

An emerging market economy is often in a state of rapid expansion. There is perhaps no better time to be invested in the growth of a country than when it enters this phase.

At this point, an emerging market has laid much of the groundwork necessary for becoming a developed nation. Capital markets and regulatory bodies have been established, personal incomes are rising, innovation is flourishing, and GDP is climbing.

Lower Per-Capita Income

The World Bank keeps a record of the gross national income (GNI) of many countries. For the fiscal year of 2021, lower-middle-income economies are defined as having GNI per capita of between $1,036 and $4,045 per year. At the same time, upper-middle-income economies are defined as having GNI per capita between $4,046 and $12,535. (By way of contrast, the U.S. is considered a high-income economy, with a GNI of $65,910)

The vast majority of countries that are considered emerging markets fall into the lower-middle and upper-middle-income ranges. For example, India, Pakistan, and the Philippines are lower-middle-income, while China, Brazil, and Mexico are upper-middle-income. Thus, all these countries are referred to as emerging markets despite the considerable differences in their economic progression.

Political and Economic Instability

For most EMEs, volatility is par for the course. Risk and volatility tend to go hand in hand, and both are common among emerging market investments.

Emerging economies can be rife with internal conflicts, political turmoil, and economic upheaval. Some of these countries might see revolutions, political coups, or become targets of sanctions by more powerful developed nations.
Any one of these factors can have an immediate impact on financial markets and the performance of various sectors. Investors need to know the lay of the land when considering which EMEs to invest in.

Infrastructure and Climate

While some EMEs have well-developed infrastructure, many are a mix of sophisticated cities and rural regions that lack technology, services and basic amenities like reliable transportation. This lack of infrastructure can leave emerging markets especially vulnerable to any kind of crisis, whether political or from a natural disaster.

For example, if a country relies on agricultural exports for a significant portion of its trade, a tsunami, hurricane, or earthquake could derail related commerce.

On the other hand, climate challenges may also present investment opportunities that are worth considering.

Currency Crises

The value of a country’s currency is an important factor to keep in mind when investing in emerging markets.

Sometimes it can look like stock prices are soaring, but that might not be the case if the currency is declining.

If a stock goes up by 50% in a month, but the national currency declines by 90% during the same period, investors could see a net loss, although they might not recognize it as such until converting gains to their own native currency.

Heavy Reliance on Exports

Emerging market economies tend to rely heavily on exports. That means their economies depend in large part on selling goods and services to other countries.

A developed nation might house all the needs of production within its own shores while also being home to a population with the income necessary to purchase those goods and services. Developing countries, however, must export the bulk of what they create.

Emerging Economies’ Impact on Local Politics vs. Global Economy

Emerging economies play a significant role in the growth of the global economy, accounting for about 50% of the world’s economic growth. Moreover, it’s predicted that by 2050 three countries will have the biggest economies: the U.S., China, and India, with only one currently being a developed economy.

But, while emerging markets help fuel global growth, some of those with higher growth opportunities also come with turbulent political situations.

As an investor, the political climate of emerging market investments can pose serious risks. Although there is potential for higher returns, especially in EMEs that are in a growth phase, investors need to consider the potential downside. For example, Thailand, Russia, and South Korea are emerging economies with high growth potential, but there is also a lot of political unrest in these regions.

Why Invest in Emerging Markets?

Emerging markets are generally thought of as high-risk, high-reward investments.

They are also yet another way to diversify an investment portfolio. Having all of your portfolio invested in the assets of a single country puts you at the mercy of that country’s circumstances. If something goes wrong, like social unrest, a currency crisis, or widespread natural disasters, that might impact your investments.

Being invested in multiple countries can help mitigate the risk of something unexpected happening to any single economy.

The returns from emerging markets might also exceed those found elsewhere. If investors can capitalize on the high rate of growth in an emerging market at the right time and avoid any of the potential mishaps, they stand to profit. Of course timing any market, let alone a more complex and potentially volatile emerging market, may not be a winning strategy.

Pros and Cons of Investing in Emerging Markets

Let’s recap some of the pros and cons associated with EME investments.

Pros

•  High-profit potential: Selecting the right investments in EMEs at the right time can result in returns that might be greater than most other investments. Rapidly growing economies provide ample opportunity for profits. But as noted above, it’s impossible to guarantee the timing of any investment.

•  Global diversification: Investing in EMEs provides a chance to hold assets that go beyond the borders of an investor’s home country. So even if an unforeseen event should happen that contributes to slower domestic growth, it’s possible that investments elsewhere could perform well and provide some balance.

Cons

•  High volatility: As a general rule, investments with higher liquidity and market capitalization tend to be less volatile because it takes significant capital inflows or outflows to move their prices.
EMEs tend to have smaller capital markets combined with ongoing challenges, making them vulnerable to volatility.

•  High risk: With high volatility and uncertainty comes higher risk. What’s more, that risk can’t always be quantified. A situation might be even more unpredictable than it seems if factors coincide (e.g. a drought plus political instability).
All investments carry risk, but EMEs bring with them a host of fresh variables that can twist and turn in unexpected ways.

•  Low accessibility: While liquid capital markets are a characteristic of emerging markets, that liquidity still doesn’t match up to that of developed economies.
It may be necessary to consult with an investment advisor or pursue other means of deploying capital that may be undesirable to some investors.

The Takeaway

While developed nations like the U.S. and Europe and Japan regularly make headlines as global powerhouses, emerging market countries actually make up the majority of the world’s economy — and some very exciting opportunities for investors.

China and India are two of the biggest emerging markets, and not because of their vast populations. They both have maturing financial markets and strong industrial sectors and a great deal of foreign investment. And like other emerging markets, these countries have seen rapid growth in certain sectors (e.g. technology).

Despite their economic stature, though, both countries still face challenges common to many emerging economies, including political turbulence, currency fluctuations and low per-capita income.

It’s factors like these that can contribute to the risks of investing in emerging markets. And yet, emerging markets can also present unique investment opportunities owing to the fact that they are growing rapidly.

Emerging market exchange-traded funds (ETFs) might invest in different assets within a single country or spread their investments throughout multiple countries. Bonds can also play a role in an emerging market portfolio. Many countries with developing economies have used the issuance of new debt to borrow money to build out their infrastructure. That means some emerging economies could offer bonds with attractive yields.

To learn more about the investment opportunities that are right for you, open an account with SoFi Invest®. SoFi has all the tools a new or experienced investor might need, including a cutting-edge trading platform and complimentary financial advisors at your fingertips.


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What Is a Limit Order?

A limit order allows investors to buy or sell securities at a price they specify or better, providing some price protection on trades.

When you set a buy limit order, for example, the trade will only be executed at that price or lower. For sell limit orders, the order will be executed at the price you set or higher. By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.

By contrast, a market order is simply a basic trade, when you buy or sell a stock at the market price.

The main caveat is that while a limit order specifies a desired price, it doesn’t guarantee the trade will occur at that price, or at all. When you set a limit order, the trade will only be executed if and when the security meets the terms of the order — which may or may not happen, depending on the market. So when you set a limit order, you could miss out on some opportunities.

Keep reading to learn how limit orders work, how they differ from stop orders, and when you might want to use a limit order.

Types of Limit Orders and How They Work

In addition to asking, What is a limit order? you might also ask, Are there different kinds of limit orders? The answer is yes. There are two types of limit orders investors can execute: buy limit orders and limit sell orders.

For buy limit orders, you’re essentially setting a ceiling for the trade — i.e. the highest price you’d be willing to pay for each share. For sell limit orders, you’re setting a price floor — i.e. the lowest amount you’d be willing to accept per share.

•  What is limit order to buy? If a trader places a buy limit order, the intention is to buy shares of stock. The order will be triggered when the stock hits the limit price or lower.

  For example, you may want to buy shares of XYZ stock at $15 each. You could place a buy limit order that would allow the trade to be carried out automatically if the stock reaches that purchase price or better.

•  What is limit order to sell? If a trader places a limit order to sell, the order will be triggered when the stock hits the limit price or higher. So you could set a sell limit order to sell XYZ stock once its share price hits $20 or higher.

As noted above, the main upside of using limit orders is that traders get to name a desired price; they generally end up paying a price they expect; and they can set an order to execute a trade that can be executed even if they are doing other things.

In this way, setting limit orders can help traders seize opportunities they might otherwise miss because limit orders can stay open for months or in some cases indefinitely (the industry term is “good ‘til canceled’ or GTC). The limit order will still execute the trade once the terms are met.

Limit orders can also be set for pre-market and after-hours trading sessions. Market orders, by contrast, are limited to standard trading hours (9:30 AM to 4 PM ET).

Remember: Even though limit orders are geared to a specific price, that price isn’t guaranteed. First, limit orders are generally executed on a first-come-first-served basis. So there may be orders ahead of yours that eliminate the availability of shares at your limit price.

Also, the price at which the order is executed could be higher than the buy limit price by the time it’s executed — or lower than the limit price, in the case of a sell order.

Also, time is a factor. In today’s market, computer algorithms execute the majority of stock market trades. In this high-tech trading environment, it can be hard as an individual trader to know when to buy and sell. By using certain types of orders, like limit orders, traders can potentially limit their losses, lock in gains, and avoid swings in the market.

Though limit orders are commonly used in day trading strategies, they can be useful for any investor who wants some price protection around their trades. For example, if you think a stock is currently undervalued, you could purchase it at the current market price, then set a sell limit order to automatically sell it when the price goes up. Again, the limit order can stay open until the security meets your desired price — or you cancel the order.

However, speculating in the market can be risky and having experience can be helpful when deciding how and when to set limit orders.

Limit Orders vs. Stop Orders

There is another type of order that can come into play when you’re trying to control the price of a trade: a stop order. A stop order is similar to a limit order in that you set your desired price for a stock, say, and once the stock hits that price or goes past it, a market order is triggered to execute the purchase or sale.

The terms of a limit order are different in that a trade will be executed if the stock hits the specified price or better. So if you want to sell XYZ stock for $50 a share, a sell limit order will be triggered once the stock hits $50 or higher.

A stop order triggers a market order once XYZ stock hits $50, period. By the time the order is executed, the actual stock price could be higher or lower.

Thus with a stop order there’s also no guarantee that you’ll get the specified price. A market order is submitted once the stop price is hit, but in fast-moving markets the actual price you pay might end up being higher or lower.

Stop orders are generally used to exit a position and to minimize losses, whereas limit orders are used to capture gains. But two can also be used in conjunction with each other with something called a stop-limit order.

Stop-Limit Orders

A stop-limit order is a combination of a stop order and a limit order. Stop-limit orders involve setting two prices. For example: A stock is currently priced at $30 and a trader believes it’s going to go up in value, so they set a buy stop order of $33.

When the stock hits $33, a market order to buy will be triggered. But with a stop-limit order, the trader can also set a limit price, meaning the highest price they’re willing to pay per share — say, $35 per share. Using a stop-limit order gives traders an additional level of control.

Stop-limit orders can also help traders make sure they sell stocks before they go down significantly in value. Let’s say a trader purchased stock XYZ at $40 per share, and now anticipates the price will drop. The trader doesn’t want to lose more than $5 per share, so they set a stop order for $35.

If the stock hits $35 — the stop price — the stock will be triggered to sell. However, the price could continue to drop before the trade is fully executed. To prevent selling at a much lower price than $35, the trader can set a limit order to only sell between $32 and $35.

When a Trader Might Use a Limit Order

There are several reasons why you might want to use a limit order.

•  Price protection. When a stock is going up or down very fast, you may not want to risk placing a market order and getting a bad price. Although it’s unlikely that the price will change drastically within a few seconds or minutes after placing an order, it can happen, and setting a limit order can set a floor or a ceiling for the price you want.

•  Convenience. Another occasion to use a limit order might be when you’re interested in buying or selling a stock but you don’t want to keep a constant eye on the price. By setting a limit order, you can walk away and wait for it to be executed. This might also be a good choice for longer-term trades, since in some cases traders can place a limit order with no expiration date.

•  Volatility. Third, an investor may choose to set a limit order if they are buying or selling at the end of the market day or after the stock market has closed. Company or world news could be announced while the market is closed, which could affect the stock’s price when the market reopens. If the investor isn’t able to cancel a market order while the market is still closed, they may not be happy with the results of the trade. A limit order can help prevent that.

Limit orders can also be useful when the stock being traded doesn’t have a lot of liquidity. If there aren’t many people trading the stock, one order could affect the price. When entering a market order, that trade could cause the price to go up or down significantly, and a trader could end up with a different price than intended.

When to Consider a Market Order vs. a Limit Order

A trader might want to use a market order if:

•  Executing the trade immediately is a priority

•  The stock is highly liquid

•  They’re only trading a small number of shares

•  The stock has a narrow bid-ask spread (about a penny)

A trader might want to use a limit order if:

•  They want to specify their price

•  They are trading an illiquid stock

•  They want to set a long-term trade (or even walk away for their lunch break and still have the trade execute)

•  They feel a stock is currently over- or undervalued

•  The stock has a large bid-ask spread

•  They are trading a larger number of shares

How to Set a Limit Order

When placing a limit order with your brokerage firm, the broker or trading platform might ask for the following information:

•  The stock or security

•  Is it a buy or sell order

•  Number of shares to buy or sell

•  Order type (limit order, market order, or another type of order)

•  Price

When setting up a limit order, the trader can set it to remain open indefinitely, (until the stock reaches the limit price), or they can set an expiration date.

For example, say a trader would like to purchase 100 shares of stock XYZ. The highest price they want to pay per share is $26.75. They would set up a limit buy order like this:

Buy 100 shares XYZ limit 26.75.

Is a Limit Order Bad?

Limit orders are not necessarily good or bad. As mentioned, they can offer advantages to investors who understand how to use them. For example, limit orders can offer more control and flexibility than using market orders. And they can work well in a number of different trading situations. If the stock being traded is highly volatile, for instance, a limit order can help traders retain control and avoid paying an unexpected price.

Each time a trader does research on a stock and decides to buy or sell shares, they also consider their goals and the current market conditions to decide whether to place a market or a limit order.

Pros and Cons of Using Limit Orders

Each type of order has pros and cons depending on the particular situation.

Pros:

•  The trader gets to name their price. One of the chief reasons traders rely on limit orders is to set baselines for profits and losses. They won’t end up paying a price they didn’t expect when they buy or get a price below their target when it’s time to sell.

•  The trader can set the order and walk away. Day trading can be time consuming and it requires a significant amount of knowledge. Investors who use limit orders don’t have to continuously watch the market to get the price they want.

•  Traders may pay less in fees. Commissions can take a bite out of your profits, something many investors would prefer to keep to a minimum. When trading illiquid stocks, sometimes the bid-ask spread is enough to cover broker fees.

•  Insulate against volatility. Volatility can cause you to make emotional decisions. Limit orders can give traders more control over their portfolio and ward off panic-buying or selling.

•  Ride the gaps. Stock prices can fluctuate overnight due to after hours trading. It’s possible to benefit from price differences from one day to another when using limit orders.
For example, if a trader places a buy limit order for a stock at $3.50, but the order doesn’t get triggered while the market is open, the price could change overnight. If the market opens at $3.30 the next morning, they’ll get a better price, since the buy limit order gets triggered if the stock is at or below the specified price.

Cons:

•  The order may never be executed. There may not be enough supply or demand to fulfill the order even if it reaches the limit price, since there could be hundreds or even thousands of other traders wanting to buy or sell at the specified price.

•  The stock may never reach the limit price. For example, if a stock is currently priced at $20, a trader might set a limit order to buy at $15. If the stock goes down to $16 and then back up to $20, the order won’t execute. In this case, they would miss out on potential gains.

•  The market can change significantly. If a trader sets a shorter-term limit order they might miss out on a better price. For example, if a stock a trader owns is currently priced at $150, the trader may choose to set a sell limit order at $154 within four weeks. If the company then makes a big announcement about a new product after that period, and the stock’s price spikes to $170, the trader would miss out on selling at that higher price.

•  It takes experience to understand the market and set limit orders. New investors can miss out on opportunities and experience unwanted losses, as with any type of investment.

What Happens If a Limit Order Is Not Filled?

A limit order can only be filled if the stock’s price reaches the limit price or better. If this doesn’t happen, then the order is not executed and it expires according to the terms of the contract. An order can be good just for a single trading day, for a certain period of time, or in some cases it’s possible to leave the limit order open-ended using a GTC (good ‘til canceled) provision.

So if you placed a buy limit order, but the stock does not reach the specified price or lower, the purchase would not be completed and the order would expire within the specified time frame.

And if you’re using a sell limit order, but the security never reaches the specified sell price or higher, the shares would remain in your trading account and the order would expire.

Limit Orders and Price Gaps

Price gaps can occur when stocks close at one price then open at a different price on the next trading day. This can be attributed to after-market or pre-market trading that occurs after the regular market hours have ended. After-hours trading can impact stock price minimally or more substantially, depending on what’s spurring trades.

For example, say news of a large tech company’s planned merger with another tech giant leaks after hours. That could send the aftermarket trading markets into a frenzy, resulting in a radically different price for both company’s stocks when the market reopens. Pricing gaps don’t necessarily have to be wide but large pricing swings are possible with overnight trading.

Limit orders can help to downplay the potential for losses associated with pricing gaps. Placing a buy limit order or limit sell order may not close the gap entirely. But it could help to mitigate the losses you may experience when gaps in pricing exist. Whether the gap is moving up or down can determine what type of limit order to place and where to cap your limit price.

The Takeaway

Limit orders can be an effective and efficient way for investors to set price caps on their trades, and also give them some protection against market swings. Limit orders offer other advantages as well, including giving traders the ability to place longer- or shorter-term trades that will be executed even if they’re not continuously watching the market. This can potentially protect investors against losses and potentially lock in gains.

That said, limit orders are complicated because they don’t guarantee that the trade will be executed at the set price. The stock (or other security) could hit the limit price — and there might not be enough supply or demand to complete the trade. There is also the potential for some missed opportunities, if the price you set triggers a trade, and subsequently the stock or other security hits an even better price.

Investors can also consider combining a limit order with a stop order. A stop-limit order can provide even more protection against potential losses.

If you aren’t quite ready to jump into that level of trading yet, but you want to start building a portfolio, you may want to start by purchasing small amounts of stocks by opening an account with SoFi Invest®. SoFi even allows investors to purchase fractional shares, so they can own a part of a favorite stock without committing to the price of an entire share.

SoFi Invest has no management fees and offers investors a range of options. You can own many different stocks rather than putting all of your money into one or two high-priced stocks.

When you open a SoFi Invest® account, you also get access to a team of financial advisors who can help you set goals and learn about the best ways to reach them.

Get started with SoFi Invest today.


SoFi Invest®
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