If I buy a stock at $45 and I put a stop limit in to sell at $40, will I be guaranteed a sell once the stock has reached this price?

By Andrew Beattie AAA
A:

Not necessarily. This is, unfortunately, one of the problems with orders. If a stop order is established, it means that the stock will be sold at or beneath a certain price. If you own 500 shares of a company trading for $45 and you put a stop order in at $40, it could be executed at $40 on the dot, but if the market is dropping fast, it may be executed at $38 or a range of lower prices as your shares are being sold off.

With a stop-limit order, you shrink the downward range by saying you only want those shares to sell at $40. For this to work, another person in the market has to bid $40 for all 500 of your shares. However, if there isn't a bid, or a combination of several bids, for 500 shares at $40, then your order won't be executed. In widely traded stocks with high volume, this is usually not a problem.

Remember, shares don't necessarily go down incrementally like a thermometer. They can jump certain prices if the bids and asks aren't matching up. It's possible for a stock to trade at $41 and then $38 without touching $40 mark in any real sense. In practice, however, this doesn't often happen and your stop limit order will likely be filled in a single go or over several trades as the stock price hovers around the $40 level. In short, a stop limit order is doesn't guarantee you will sell, but it does guarantee you'll get the price you want if you can sell.

See The Basics of Order Entry and Protect Yourself From Market Loss to learn more on this topic.

The question was answered by Andrew Beattie.

RELATED FAQS

  1. What is the difference between a Hanging Man and a Hammer Pattern?

    Understand the difference between the hanging man and hammer candlestick patterns, the components of each and what they indicate ...
  2. How do I build a profitable strategy when spotting a Hanging Man pattern?

    Learn how to use the opportunity for a low-risk, high-reward trade that is presented when a trader identifies the hanging ...
  3. How are Hanging Man patterns interpreted by analysts and traders?

    Learn the meaning of the hanging man candlestick formation and why it is viewed by market analysts and traders as a possible ...
  4. What are the differences between divergence and convergence?

    Find out what technical analysts mean when they talk about a market experiencing divergence or convergence and how they affect ...
RELATED TERMS
  1. Commercial Real Estate Loan

    definition of a commercial real estate loan
  2. Bidding Up - Securities

    The act of increasing the price an investor is willing to pay ...
  3. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  4. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  5. Bear Fund

    A mutual fund designed to provide higher returns when the market ...
  6. Short Put

    A type of strategy regarding a put option, which is a contract ...

You May Also Like

Related Articles
  1. Investing on margin can be profitable but it's a risky play that needs care.
    Trading Strategies

    Margin Investing: Big Risk, Big Reward

  2. Stock Analysis

    Buyinb Facebook Stock, A Beginner's ...

  3. Economics

    Profiting From China's Breakout: The ...

  4. Trading Strategies

    Is the Stock Correlation Strategy Effective?

  5. The economy has its ups and downs. Investors who take a disciplined approach and diversify their portfolio are better prepared for the next bear market.
    Trading Strategies

    Protect Your Nest Egg From A Bear Market

Trading Center