Stop-Limit Order

What Is a Stop-Limit Order?

A stop-limit order is an instruction to buy or sell a security using two prices. The first is a stop price, which triggers the order when the market reaches it. The second is a limit price, which sets the worst acceptable price for the trade. Investors use this order type to control the price they might receive, but it carries the risk that the order will not be filled at all.

How It Works

Until the stop price is reached, the order stays inactive and does not trade. Once a trade occurs at or through the stop price, the order converts into a limit order at the limit price, and it can then execute only at that price or better.

For a buy stop-limit order, the limit price is normally set at or above the stop price. For a sell stop-limit order, it is normally set at or below the stop price. The distance between the two prices determines how much room the order has to fill.

If the market moves quickly past the limit price, the order may remain unfilled while the security keeps trading away from it. In that case the investor's position stays unchanged, which can be a problem when the investor wanted to exit a position that is falling.

Example

Suppose an investor owns shares of a company and wants to sell them if the price drops to a certain level, but does not want to accept a price much lower than that. The investor could place a sell stop-limit order with a stop price at that level and a limit price slightly below it. If the stock trades down to the stop price, the order becomes a limit order. If the stock then falls quickly below the limit price before a buyer appears, the order will not execute and the shares remain unsold.

Advantages and Disadvantages

Advantages:

• It limits the range of prices at which the trade can execute.
• It avoids the uncertain fill price of a market order once the trigger is hit.

Disadvantages:

• Execution is not guaranteed, even after the stop price is reached.
• Sudden price gaps can carry the market past the limit price entirely.
• A plain stop order avoids the risk of non-execution, but it may fill well away from the stop price because of slippage.