Stop-Limit Order

A stop-limit order is an order to buy or sell a security that combines the features of a stop order and a limit order. Once the stop price is triggered, the order becomes a limit order rather than a market order. This allows investors to control the price at which the order is executed, ensuring that they don’t sell or buy at a price worse than the limit they have set. However, if the market price doesn’t reach the limit price, the order may not be executed.

Example

An investor places a stop-limit order to sell a stock if its price drops to $100, with a limit price of $95. If the stock falls to $100, the order is triggered, but the shares will only be sold if the price remains above $95.

Key points

• A combination of a stop order and a limit order.

• The order becomes a limit order once the stop price is triggered.

• Provides price control but may not be executed if the market doesn’t reach the limit price.

Quick Answers to Curious Questions

How does a stop-limit order protect investors from unfavorable execution prices?

It ensures the order is only executed at the specified limit price or better, preventing unfavorable market prices.

What’s the risk associated with a stop-limit order?

If the price doesn’t reach the limit price, the order may not be executed, leaving the investor exposed to further market movements.

When might an investor choose a stop-limit order over a stop-loss order?

An investor may use a stop-limit order when they want more control over the execution price, rather than accepting any market price once the stop is triggered.