A stop-limit order combines two order types: a stop order and a limit order. Once the stop price is triggered, instead of sending a market order to sell, it sets a floor on what price you'll accept. The result is more control over your exit price, at the cost of some execution certainty. If the price drops past your limit before the order fills, it won't execute at all.
Placing a stop limit order
When placing a stop limit order there are two prices that need to be set.
Stop Price: This is placed lower than the current price. This stop order will trigger once the market price falls to or below this price. This is the point at which the investor no longer feels confident holding this investment.
Limit Price: The limit price overrides the stop order if the stock falls far below the stop price in after-hours price changes. This limit order will be sent to the market only when the stop price is triggered, which in this case would be immediately when the market opens. This is the price that the investment waits to be sold at or better. If the market price is already available at the limit price or better, it will execute immediately. If the market price is below the limit price, it will wait until the market price rises to the limit price.Benefits and risks
The main benefit of a stop-limit order is price control: you won't sell below your set limit, which protects against brief dips or after-hours price gaps. The risk is the flip side of that same feature. If the price drops dramatically and doesn't recover, your order may never fill, leaving you holding a position you were trying to exit. When getting out quickly matters more than getting out at a specific price, a regular stop order is the better tool.
Waiting for execution
When using a stop limit order, the stop price and the limit price operate on different durations as they are separate orders. The limit order only gets sent to the exchange once the stop order has been triggered. At most brokerages, the duration selected for the stop limit order is the duration that will be used for both the stop order as well as the limit order. The duration for the limit order will only start once it is sent to the market.
Most brokerages provide three duration options.
Day: The order remains active until the market closes. If the price is not reached by end of day, the order is automatically cancelled.
Good 'til cancelled (GTC): The order stays open until it is filled or manually cancelled. Most brokerages will automatically cancel GTC orders after 90 days to prevent old orders from being forgotten and unexpectedly executed.
Good 'til date (GTD): The investor selects a specific expiry date. The order is cancelled at the end of the day on that date if it has not been filled.
As a reminder, a stop order is placed not because you want to sell at that price, but because you want to prevent further losses if it continues to fall. A limit order is then placed to sell at a specific price to exit if the stock drops further below the stop order than anticipated.
Buying with a stop limit order
Stop-limit orders work for buying, too. If you want to buy a security only after it has shown upward momentum, you set a stop price above the current market price. Once that stop is triggered, the limit price controls what you're willing to pay. Setting your limit close to your stop helps avoid buying in at a much higher price if the stock gaps up unexpectedly.Summary
A stop-limit order lets you set two conditions on a trade: a stop price that triggers the order, and a limit price that controls your exit. Once the stop is hit, the order goes to the market, but only fills at your limit price or better. If that price isn't available, the order waits, and if it never arrives, the order doesn't execute. That's the risk: in a fast-moving market, price control can come at the cost of getting out at all.
