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What is the practical usage for selling with a stop-limit order? If we reach a stop-loss point we are likely to sell to protect from a bigger loss. What situation would need to add a limit order on that?

Thanks,

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    You can also use stop limit orders to get into a trade as part of your buy order, eg. you want to buy in a breakout if price goes above $10 but if it goes above $10.50, you want to avoid buying. – user9822 Feb 8 '15 at 1:52
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    And you could use a stop limit order when short selling, you want to short sell if price breaks through support at $9 but do not want to sell anymore if price drops below $8.50. – user9822 Feb 8 '15 at 20:16
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If one wants to have a bound on the loss percentages that are acceptable, this is would be a way to enforce that. For example, suppose someone wants to have a 5% stop-loss but doesn't want this to be worse than 10% as if the stock goes down more than 10% then the sell shouldn't happen. Thus, if the stock opened in a gap down 15% one day, this triggers the stop-loss and would exit at too low of a price as the gap was quite high as I wonder how familiar are you with how much a stock's price could change that makes the prices not be as continuous as one would think. At least this would be my thinking on a volatile stock where one may want to try to limit losses if the stock does fall within a specific range.

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One practical application would be to protect yourself from a "flash crash" type scenario where a stock suddenly plunges down to a penny due to transient market glitches.

If you had a stop-loss order that executed at a penny (for a non-penny stock) it would be probably be voided by the exchange, but you might not want to take that risk.

  • by saying take that risk did you mean "not to sell the stock if it's too low"? – AGamePlayer Sep 26 '14 at 5:25
  • I meant that you might not want to put your faith in the exchange (or the SEC) to void a stop-loss order which executed at an anomalous price. – jjanes Sep 26 '14 at 5:33
  • May I understand it in this way? A stop order is to make sure you will 100% sell your stock if the trigger is fired while a stop-limit order is to make sure you will sell the stock at a fixed price if the trigger is fired. The risk for the first is you may get a very bad price and the risk for the second is you may never sell the stock and it would even go worse. – AGamePlayer Sep 26 '14 at 9:23
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An important thing that many people fail to realize is that the number of shares outstanding in a stock, times the current market price of those shares, does not represent anything related to the total value of those shares. If a company has one million shares outstanding and its total value is $10 million, then the real worth of each share is $10. If few people feels like buying or selling, but a few people think the company is worth $50 million and offer $50/share, that could raise the market price to $50/share, but it wouldn't mean that the company became worth five times as much; it would merely mean the stock was overpriced.

If, after the price went to $50/share, all the owners of the stock put in stop-loss orders at $45. Note that the real $10/share "real value" of their stock would never have changed. If the people who thought the stock was worth $50 decided to get out of the market, and nobody else was willing to offer more than $10, that would instantly drop the price to $10. The fact that a million shares of stock have stop-loss orders at $45 wouldn't magically generate buyers for those stocks at that price. Indeed, unchecked stop-loss orders would have the reverse effect, since many people who would have been willing if not eager to buy the stock if it had been available for less than $10/share would instead be trying to sell it below that price.

It's too bad people think that the number of shares outstanding times the current market price represents some kind of "meaningful quantity". If the present cash value of all future payouts associated with a share of stock is $10, then someone who buys a share of stock for less than that makes money off the seller; someone who pays more loses money to the seller. Many people think they can lose money to the seller and still come out okay if the price goes higher, but what that really means is that they're hoping to find a bigger sucker--a game where it's guaranteed that some people will have losses they don't recoup.

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    This is alot of dribble about nothing. Your answers don't make much sence. Try and keep your answers sweet and short and to the point. – user9822 Feb 8 '15 at 20:12
  • @MarkDoony: It is possible, though rare, for stock prices to experience sudden crashes; many people regard such crashes as mystifying. While it's generally not possible to know the distribution of pending limit or stop-loss orders unless or until they are executed, certain distributions of such orders will ensure that if a stock price below a certain level, it will instantly fall to a certain lower level; further, the distribution of the orders will determine how much people with stop-loss orders will get when their stocks are sold. – supercat Feb 8 '15 at 21:02
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    again alot of dribble about nothing. I bet you don't even invest in the stock market or use stop loss orders, you probably think it is too risky right! – user9822 Feb 8 '15 at 21:48
  • @MarkDoony: If the volume and price distribution of pending purchase orders (bids) relative to the volume of shares being sold simultaneously aren't responsible for setting the price at which a stop-loss order executes, what is? – supercat Feb 9 '15 at 14:47
  • Stop loss orders can be placed at any level, they can be used to buy into the market, to buy out of the market (when short selling), to sell out of the market, or sell into the market (when short selling). A stock trading at $50 is not ever going to just drop to $10 instantly, as most stocks trading at $50 will have quite high liquidity, so most stop losses will be executed within 1% of the stop, and maybe if the stock is very volatile and the price gaps alot 5% to 10% from the stop level. I stay away from volatile stocks so my stops hit right on the mark 90% and within 1% the rest. – user9822 Feb 9 '15 at 20:01

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