Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Stop-Limit Order

What it is:

A stop-limit order combines the features of a stop order and a limit order.

Once a stock reaches the stop price, a limit order is automatically triggered to buy/sell at a specific target price.

How it works (Example):

Let's say you bought stock ABC at $50 per share. You don't want to lose more than $5 per share, so you set a stop-limit order for $45.
 
If the stock dips to $45, the stop price triggers a limit order to sell at $45. If a rapid price decline takes the stock lower than $45, the limit order will ensure that you don't sell at the lower price. The limit order will only execute when the stock reaches $45 again.

This is an important difference between stop-loss orders and stop-limit orders. When using a traditional stop-loss order, if ABC falls to $45 and triggers the stop price, at that point the order becomes a market order. If the price continues to fall and is at $42 by the time your market order is executed, then you will only receive $42 per share.

Why it Matters:

A stop-loss order can protect you on the downside when the stock market is acting somewhat normally. But if the market is susceptible to violent swings, when the stop-loss price is triggered, the order automatically becomes a market order. At that point you lose complete control over the price at which the trade is executed.

A stop-limit order enables you to maintain some control over the price at which you buy or sell. But note that with all limit orders, if the limit price is never reached, the order will never be executed.  In the above example, if the stock falls to $42 and never bounces back to $45, your limit order won't trigger and you'll still own the shares you were trying to sell at $45.

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