One of the problems with using a stop-limit order to sell a security is there is no assurance you'll get the price that you want. For example, if you buy a stock at $45 and place a stop-limit to sell at $40, you're placing a conditional order that only gets executed if the conditions of the trade are met. For your stop-limit order to be filled, it will need to meet the parameters you set regarding the target price for the trade, the outside price for the trade, and a specified time frame.
While a stop-limit order gives traders more control over the conditions of the trade, it does not act as a guarantee the trade will get filled. Here we review what constitutes a stop-limit order and some common reasons why your stop-limit order might not get executed.
- A stop-limit order to sell a stock combines a stop order with a limit order, meaning shares are sold only after they reach a specified price, with a limit on the minimum price the seller will accept.
- While using a stop-limit order gives investors more control over how their order will be filled, it's not a guarantee they'll receive the price they want.
- If there are no bids that meet the conditions of your stop-limit order, your trade will not get filled.
Stop Order vs. Stop-Limit Order
First, it's important to understand the differences between a stop order and a stop-limit order. While similar-sounding, the conditions for each order type are not the same.
If you establish a stop order to sell a stock, it means that the stock will be sold at or beneath a certain price. A stop order triggers a subsequent market order when the price reaches your designated point.
For example, if you own 500 shares of a company trading for $45 and you put a stop order in at $40, you are saying you will sell your shares at $40 or the best available price under $40. Your stop order could be executed at $40 on the dot. But if the market is falling fast, it may be executed at $38 or a range of lower prices as your shares are being sold off.
In contrast, investors who opt for a stop-limit order to sell a stock are looking to have more precise control over when the order should be filled by specifying a range of acceptable prices. A stop-limit order includes two prices:
- The stop price, which is the start of the specified target price for the trade
- The limit price, which is the outside of the price target for the trade.
The stop-limit order will be triggered once the given stop price has been reached. The stop-limit order then becomes a limit order to sell at the limit price or better. In our example, with a stop-limit order, you could reduce the downward range by indicating you only want to sell your shares at a stop price of $42 with a limit price of $40.
An advantage of using a stop-limit order is that it can help the investor mitigate risk by locking in gains or limiting losses.
Why Some Stop-Limit Orders Don't Sell
To make the stop-limit order work in our above example, another person in the market has to bid somewhere in the range of your $42 stop price and $40 limit price for all 500 of your shares. However, if there isn't a bid—or a combination of several bids—then your order won't be executed. In widely traded stocks with high volume, this is usually not a problem, but in thinly traded or volatile markets, your order may not get filled.
Also, remember, shares don't necessarily go down incrementally like a thermometer. They can jump to certain prices if the bids and asks aren't matching up. It's possible for a stock to trade at $43 and then fall to $39 without touching the $42 mark.
In practice, however, this doesn't happen very often and your stop-limit order will likely be filled either in a single trade or over several trades as the stock price hovers around the $42 level. In short, a stop-limit order doesn't guarantee you will sell, but it does guarantee you'll get the price you want if you can sell.