3

"A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher." - Investopedia

"A stop-limit order will be executed at a specified price, or better, after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better." - Investopedia

If the stop-limit order simply becomes a limit order at the stop price, what is the point of making a stop-limit order if you can simply make a limit order? Both definitions appear to be the same thing to me. Stop-limit orders have a given "stop" price while limit orders have "a specified price," and both sell or buy at this price point. I suppose the difference could be the fact that before the stop-limit order is executed, it is a different type of order, but I don't see how there's a functional difference.

4

The investopedia article gives a decent example:

For example, assume that ABC Inc. is trading at $40 and an investor wants to buy the stock once it begins to show some serious upward momentum. The investor has put in a stop-limit order to buy with the stop price at $45 and the limit price at $46. If the price of ABC Inc. moves above $45 stop price, the order is activated and turns into a limit order. As long as the order can be filled under $46, which is the limit price, the trade will be filled. If the stock gaps above $46, the order will not be filled.

If instead a limit buy at $46 were entered while the stock was at $40, then the stock would likely be bought for $40, since the limit order means "buy at any price less than $46". If just a stop order were placed, then the stock could be bought for more than $46, since the stop means "buy at any price as soon as the stock goes higher then $46".

Selling is the same, but the directions are opposite. Suppose the stock in the example above has a current price of $46 and you put in a stop-limit sell with a stop price of $41 and a limit of $40. When the stock drops below $41, a limit sell is placed that will sell your stock for at least $40 if possible. If the stock drops below $40 before your limit order can be filled (e.g. because there are many other sellers front-running you), then your limit order is not filled until the price comes back to $40.

If instead you had just a limit sell, since the price is already above $40 you'd likely get it filled immediately somewhere near $46. A "normal" limit sell is placed above the current price, since a limit sell is "sell the stock at any price above X". With a stop-limit sell, both prices are generally below current market ("sell if the stock drops below X, but don't sell for less than Y")

  • I understand the difference for buying, but what about for selling? If I place a stop-limit order to sell with a stop price at $45 and a limit price at $46, isn't that the same as placing a limit order at $46? Why go through the additional step of a stop price? – Toby Dec 27 '17 at 20:46
  • @Toby It's the same, but the directions are opposite. See my edit. – D Stanley Dec 27 '17 at 20:50
2

Stop orders wait until a particular (adverse) condition is met before turning into a limit order.

On the sell side:

  • If the price is currently $40 and you submit a limit order to sell at $36, it will immediately execute at $40 because this is even better than $36.
  • If the price is currently $40 and you submit a stop-limit order to sell at $36, it will wait until the price falls to $36 before selling.

On the buy side:

  • If the price is currently $40 and you submit a limit order to buy at $45, it will immediately execute at $40 because this is even better than $45.
  • If the price is currently $40 and you submit a stop-limit order to buy at $45, it will wait until the price rises to $45 before buying.

Generically you can think of a stop order as the opposite of a limit order. The limit order executes when prices are good for you while a stop order executes (turns into a market or limit order) when prices are bad for you. You use it to limit your losses if you think prices are going to get even worse.

========== Edit ==================

As Keith points out, a stop limit order may also have a different limit and stop price. In this case the stop converts to a limit order when a bad price is reached (the stop price), and the limit order then executes when the price improves enough to reach the limit price.

  • 1
    While your answer is correct, I think you need to fully define a stop limit order; which can be different than a simple stop order. You seem to have omitted the fact that a stop limit order can have BOTH a stop price and a limit price defined. – Keith Dec 28 '17 at 7:23

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.