Stop Limit Order

An investor can avoid the risk of an order executing at an unexpected price by placing a stop limit order. A stop limit order combines the feature of both stop and limit order. Once the stop price is reached, a stop limit order becomes a limit order that will be executed at a specified price. The benefit of stop limit order is that the investor can control the price at which the order can be executed but the limit price may also prevent the order from being executed if the stock’s price may move away from the specified limit price, which may occur in a fast moving market.

Example

Suppose you buy the stock XYZ at $50 per share. You don’t want to lose more than $5 per share, so you set a stop- limit order for $45. If the stock dips to $45, the stop price triggers a limit order to sell at $45. If the price drops quickly lower than $45,  the limit will ensure that you don’t sell at the lower price. The limit order will only execute when the stock reaches $45 again.

Note:  With all limit orders, if the limit price never reached, the order will never be executed.