A stop limit order is a type of order that combines the features of a stop order with those of a limit order. A stop limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached by the market, the stop limit order becomes a limit order to buy (or sell) at the limit price or better. This order is then handled as defined by a limit order.
The primary purpose of a stop limit order is to give you more control over where the order should be filled. The downside, as with all limit orders, is that the trade will not be executed if the stock does not reach the limit price. These types of orders may be placed with special instructions, like GTC (good until cancelled). Stop limit orders are used by some investors to buy a stock when it reaches a certain price, allowing the investor to buy when the stock has upward momentum behind it.
For this example, we only want to sell our fictional XYZ stock if the price drops to 29.75, but we don't want to sell at a price lower than 29.75. A regular stop order becomes a market order as soon as the stop price is reached. However, a stop limit order becomes a limit order once the stop price is reached. In this example, we are only going to sell our position if the price of the stock drops to 29.75. Then, the stock must trade at 29.75 or higher. This order takes a little time to reason through. Just like a stop order, a stop limit order must be triggered. After the trigger, this order type then turns into a limit order.
1. Click the Trade tab.
2. Choose buy or sell from the first drop-down box (choose sell for this example).
3. Enter the number of shares and the symbol. Next, select Stop Limit from the drop-down box next to Order Type. As soon as you select Stop Limit for your order type, the stop price and the limit price fields will appear. Both are mutually exclusive and do not require similar prices. In this example, we have decided to have our stop price and our limit price be exactly the same.
We have decided to use GTC duration for this order.
As a refresher, once XYZ trades at 29.75, the stop limit order is triggered, and the order becomes a limit order with a limit price of 29.75. A stop limit has the potential for triggering and never filling if the stock never travels at or higher than our limit. This is important and could lead to frustration if not understood.
4. Review and complete your order as you would any other order type.
Stop Limit Requirements
Stop orders must be placed at least .10 below the current bid or above the current ask.
