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 timeframe.
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: 1) a stop price, which is the start of the specified target price for the trade and 2) 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. (To learn more about this topic, see: The Basics of Order Entry and Use Stops to Protect Yourself From Market Loss.)