What is a Stop Limit Order?

Limit orders are one of the most valuable tools when it comes to trading securities. Here are some stop limit order basics and how the different orders work.

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Using “orders” to buy and sell stocks lets an investor execute trades at a predetermined price. This provides a significant advantage when it comes to trading securities. If you’re trading with a broker or using the internet to make trades, you can give specific details on how to fulfill your order if you don’t want to purchase or sell shares at the current market price. For example, you might want to wait until the stock price is lower before you buy or higher before you sell. You can use stop and limit orders – and the stop limit order – to specify the stock price at which you want your trade to be made.

Market Order

A market order is an order to buy or sell a stock now at the best available price. The best available price may be higher or lower than the last-trade price or a real-time quote from a stock ticker. Your trade is executed in kind of a queue along with other orders that have been made for that stock. When your order is made, previous trades or even other market conditions may have affected the stock price.

Market orders are typically cheaper to execute than other types of orders because they require less action from the broker. If you use a market order for your trade, you do so with the understanding that the trade price may not be the same as when you last checked the price.

Stop Order

A stop order is an order to buy or sell a stock at the best available price, but only when the stock has reached a certain price. Once that price is reached, the order becomes a market order and is executed immediately. The order will always be filled, but may not be filled at the stop price because the orders because it’s made for the best possible price – the share price may have moved up or down after the order was placed. So, there’s no price guarantee with a stop order. In a volatile market, it’s very likely that your order won’t be made for the stop price and could be made for a higher price than what you would otherwise have wanted to pay.

Limit Order

A limit order is an order to buy or sell stock at a maximum or minimum price – the limit price. The order is only filled if the stock reaches that price. A limit order guarantees trades will be made at a certain price if they’re made, but the trade may not be made at all if the stock never reaches the price you’ve set or if the prices move too fast. You’d use a limit order when you want the stock, but you’re not necessarily willing to pay more than a certain price. Or, when you want to sell a stock, but not lower than a certain price. Limit orders may come with higher commission prices, based on your broker dealers pricing.

Stop Limit Order

A stop limit order combines both the stock order and limit order: when the stock price reaches the stop price, the order becomes a limit order and is filled for the stop price or a better price if one is available. The stop limit order gives you greater control over the stock purchase price by allowing you to set the price at which your trade is made. It’s actually similar to a stop order except that the order converts to a limit order versus a market order once the stop price is reached. But, the stop limit order also inherits one of the downsides of the limit order – that the order may never be filled if the limit price is never reached perhaps because the share price moved past the stop price too quickly.