Next video:
Loading the player...

A stop-limit is an order to sell or buy a stock once it reaches a certain level, but only if the shareholder can obtain a specified price.

Anna owns 100 shares of XYZ Corporation, whose stock is now trading at $18 a share. While XYZ has enjoyed a nice run, she wants to cut her ties to the stock if it experiences a significant fall.

She contacts her broker and places the following stop-limit order:

Sell 100 XYZ at 15 stop, 14.75 limit

The order will be triggered if the share price drops to $15. But unlike a standard stop, it now becomes a limit order. That means Anna’s broker will only sell her 100 shares if the price stays at $14.75 or higher.

The advantage of a stop-limit order is that sellers don’t have to accept fire-sale prices if the stock takes a temporary plunge. 

Investors can also use stop-limits to buy shares, a strategy that many short-sellers use to cap their potential losses. In a short sale, an investor sells a stock they don't own with the hope of buying the shares back at a new, lower price and capturing the profit. But if the stock unexpectedly rises, the stop-limit allows them to trigger a buy order. 

Let’s say Tim shorts the same XYZ stock that’s now trading at $18. But instead of going down, as he originally hoped, the price climbs. To protect against huge losses, he places this stop-limit order. Once shares hit $20, the broker will look for an opportunity to sell his 100 borrowed shares at $20.50 or less. 

Buy 100 XYZ at 20 stop, 20.5 limit

 

 

  1. No results found.
Related Articles
  1. Investing

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
  2. Investing

    Understanding The Basics of A Stop-Limit Order

    There are many techniques used by investors and traders to restrict losses or lock in gains. The stop-limit order is one such technique.
  3. Trading

    Which Order to Use? Stop-Loss or Stop-Limit Orders

    Stop-loss and stop-limit orders can provide different types of protection for investors seeking to lock in profits or limit losses. Investors need to know how each type of order works to know ...
  4. Investing

    The Basics of Trading a Stock: Know Your Orders

    Taking control of your portfolio means knowing what orders to use when buying or selling stocks.
  5. Investing

    Understanding Buy Stop Orders

    A buy stop order is an order to buy a stock at a specific price above its current market price.
Hot Definitions
  1. Investing

    The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
  2. Stagflation

    A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
  3. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  4. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
Trading Center