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What to Know About Stop Limit Orders

If you want to gain better control over your investments, then using orders is something to consider. There are many types of orders to choose from, but one that’s worth paying attention to is the stop limit order. With it, you’re saying that you want certain things to happen as the market value or price of a stock changes. It’s a way that you can maintain some control over your investments, even in a volatile market. Here we explore what a stop limit order is, what the risks are, and other considerations.

What Is a Stop Limit Order?

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A stop limit order is essentially a direction you’re giving your market manager for what to do with your securities when certain events occur. The stop limit order is a combination of a stop order, which is a rule stating that you want to buy or sell shares once they’ve reached a specific market price, and a limit order, which involves having a maximum price in place that you’re willing to buy investments at or a minimum price that you’re open to selling your stocks at.

A stop limit order helps you minimize the risk associated with trading stocks, especially when you’re unable to continuously watch the stock market throughout the day and make quick determinations as market pricing changes.

However, there are no guarantees that you’ll be able to execute exactly what you’re hoping for, and all orders must be completed, partially filled, or canceled during market hours.

When You Should Use a Stop Limit Order

Unless you’re a professional trader, it’s unlikely that you have the means to watch over your investments at all hours that the market is open. The more diversified your portfolio is, the harder it’ll be to keep track of your shares and make rapid decisions and moves to maximize your earnings. This is precisely why stop limit orders are an effective investment strategy for many traders. In the absence of watching your investments at all times, you’re still able to maintain control over your buying and selling process.

You should consider using a stop limit order when you have a solid idea in mind of what you’re willing to buy or sell stocks for and want to give yourself a better chance of achieving that. Stop limit orders give you some control over your stocks, even when you aren’t paying much attention to them. As a buyer, you’re controlling when you buy stocks and the amount of money you spend on them. As a seller, you are only accepting a certain minimum per share and minimizing the risk of losing too much money from a volatile market.

It’s important to explore stop limit orders when you have volatile stocks too, as the pricing on these stocks moves a lot faster and it’s possible to miss out on opportunities unless you have limits in place.

Difference Between Stop Price and Limit Price

There are two prices associated with a stop limit order: a stop price and a limit price. Here are the differences:

  • Stop price: A stop price is the price you want to buy new shares at or sell your current shares for. Once a share gets to your stop price, an order is generated.
  • Limit price: A limit price is the absolute minimum or maximum that you’re willing to sell or buy shares for.

For example, assume that a company is selling its shares for $20 per share. If you’re a buyer, you may put in a buy stop limit order because you think the price per share will increase during the day and you want to get these stocks at the best price possible. So, you establish a stop price of $25. This means that once the company’s shares reach $25 per share, your order is generated and moves to market. You’d also have a limit price in place of maybe $27, which indicates the maximum amount you’re willing to pay per share.

In this scenario, your order is filled if it can be processed before the price increases beyond your limit price. If it isn’t filled before the price goes up past your maximum, your order is canceled.

As a seller, you can also have a sell stop limit order, which works similarly to a buyer’s position. For example, you may own stocks that currently have a market price of $20 per share, but you believe this price will decrease. You could choose to put a stop price of $18 in place so that your sale of shares is live once they reach $18 per share. You may also put a limit order of $16, which means this is the absolute minimum you’d be open to selling your stock for. If the price of a stock goes below $16 without being purchased, the order isn’t filled.

In this scenario, you’d retain your shares and hope that the market causes the value of your stocks to increase again so you can try another time to achieve the price you’ve been hoping for.

Stop Limit Order vs. Stop Loss Order

You know what a stop limit order is now, but as a refresher, it’s composed of two prices. One (the stop price) is when the order will be initiated; the other (the limit price) is the absolute minimum or maximum that you find acceptable for the sale or purchase of stocks. In a stop limit order, the order isn’t fulfilled if the price goes beyond the limit price.

A stop loss order, in contrast, has no limit price. Therefore, when a stock has reached a stop price and an order begins, that stock order will be fulfilled regardless of what the price ends up being.

When a well-traded company is involved, the order is likely processed very quickly, meaning that whether you have a stop limit order or a stop loss order in place likely won’t matter. However, stocks that are less traded or have more volatility can mean the order is slower to complete. If you only have a stop loss order in place, you may be buying or selling stocks for more or less than what you want.

Risks Associated With Stop Limit Order Risks

As with any investment decisions, there are some risks involved with stop limit orders. The largest risk is an order not executing. Imagine you’re a seller. Depending on when you put in your order (or it’s automatically put in based on your order rules), there may be other orders ahead of yours. Once it’s your turn, the shares that were once available at your stop price may no longer be available, leaving you with stocks you aren’t going to sell at this time because it goes against your limit price.

It’s also possible for your order to only be partially filled. Let’s say you want to sell 500 of your shares and the order is going through, but you’ve only sold 300 before the price per share drops below your limit price. That leaves 200 shares that aren’t sold. This is a common scenario of stop limit orders and something to be aware of before deciding to use this type of order. Remember that if this happens and you choose to get your order filled over several days, each new day generates a commission charge.

If you find yourself in this situation, you may want to wait and hope the stock goes back up to your limit price or beyond. If waiting is not something that appeals to you, you can use a stop order or market order to sell the shares anyway. This will result in getting less money for your shares than you wanted, but at least you’re removing the shares from your portfolio if you don’t feel it’s going to go back up to a more attractive price.

How Long Are Stop Limit Orders Good For?

When you put a stop limit order in place, you can decide how long it’s good for. You can choose between keeping the order valid for the current market day, meaning it’ll expire at the end of the market day, or leaving it open for other market days. If you keep the order open, it can remain that way until it can be completed or you cancel it. This is commonly called good-till-canceled (GTC) stop limit orders.

Limit Order Conditions

In addition to your stop limit order, you can put in other limit conditions, which can help you keep even more control over your investment moves. These conditions include:

  • All-or-None (AON): With this condition, the order must be executed in its entirety or not at all. The order won’t be filled if the shares can’t all be completed together.
  • Fill or Kill: The Fill or Kill condition means your order will be filled at a specific price, but if it cannot be, it’s canceled.
  • Immediate-or-Cancel (IOC): With this condition, partial fills are acceptable. You’re indicating that you want to execute an order immediately and cancel any unfilled portions. This is an excellent option for most when the market is very volatile because it helps you to get as close as possible to the current market price.

With this knowledge of stop limit orders, you’re able to make decisions ahead of market movements and, therefore, not have to keep constant watch over your investments. It’s a great option for those who know exactly what they want from their investments.