Stop Limit Order

MoneyBestPal Team
A request to purchase or sell a security at the limit price, which is a predetermined price or better.

A stop-limit order combines the characteristics of a limit order and a stop order. When a security's price hits the stop price, a stop order is placed to purchase or sell the security at that price. A limit order is a request to purchase or sell a security at the limit price, which is a predetermined price or better.

An investor can specify two prices with a stop-limit order: the stop price and the limit price. The order changes to a limit order when the stop price is reached and can only be executed at the limit price or better. The investor can exert more control over the execution price and prevent unwelcome slippage in this way.

Consider a scenario in which a shareholder owns 100 shares of the $50/share XYZ stock. If the price of the shares drops to $45, but no lower than $43, the investor wishes to sell them. The investor may submit a stop-limit order with a stop price of $45 and a limit price of $43 to sell 100 shares of XYZ. The order changes to a limit order to sell at $43 or higher if XYZ slides to $45 or lower. The order won't be filled if XYZ drops below $43 before it is filled, but the investor will still have 100 shares of XYZ.

When security climbs over one level but not higher than another, a stop-limit order can also be used to buy it. As an illustration, let's say a shareholder wants to purchase 100 shares of ABC stock, which is now trading at $20 per share. The investor wants to invest in ABC but will not pay more than $24 since he thinks it will increase if it breaks above $22. A stop-limit order with a $22 stop price and a $24 limit price can be placed by the investor to purchase 100 shares of ABC. A limit order to purchase at $24 or below is created if ABC moves to $22 or above. Until the order is filled, ABC may not exceed $24; else, the order

Investors who want to protect their gains or reduce their losses in erratic markets may find a stop-limit order handy. By establishing defined goals, it can also assist investors in entering or exiting holdings at advantageous prices. However, using a stop-limit order carries the following dangers and disadvantages:
  • No guarantee of execution: The execution of a stop-limit order is not guaranteed because it depends on whether there are sufficient buyers or sellers at the limit price. The deal could be lost totally if there is no activity on the market at or near the limit price after the stop price is triggered.
  • Partial fills: In the event that there are insufficient shares available at the limit price, a stop-limit order may only be partially filled. The remaining 500 shares will remain in the investor's account unless another seller makes an offer of $43 or more. As an illustration, if an investor places a stop-limit order to sell 1000 shares of XYZ with a stop price of $45 and a limit price of $43, and only 500 shares are available at $43 after the stock drops to $45, only 500 shares will be sold.
  • Opportunity cost: If the limit price is set too distant from the current market price, a stop-limit order could prohibit an investor from benefiting from positive market movements. For instance, if an investor executes a stop-limit order to purchase 1,000 shares of ABC with a $22 stop price and a $24 limit price, and ABC rises from $20 to $25 in a single day, the trade will not be carried out because the stock never fell below $22. The investor would lose out on the opportunity to purchase ABC at $25 or less, which could have generated large returns.

As a result, before putting in a stop-limit order, an investor should carefully assess their risk tolerance, trading goals, and market conditions.