# Why use a stop-limit order instead of a limit order?

"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.

## 2 Answers

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.

• 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. Dec 28, 2017 at 7:23
• A Stop-Limit will not guarantee a fill, while a plain Stop order will, as it becomes a Market order once the Stop condition is met (at least 100 shares at the Stop price). For example in the case of a gap down, and your limit is above the new price, the limit order will stay open waiting for the price to rise back up to your limit (for closing a long) Apr 25, 2020 at 23:27
• Wish you gave buy-side for price currently \$45 and order at \$40. When buying, i assume i want to buy low. Meaning, wait until the price goes down to my target price. Feb 16, 2021 at 20:39

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, 2017 at 20:46
• @Toby It's the same, but the directions are opposite. See my edit. Dec 27, 2017 at 20:50
• @Toby Limit price at \$45 and stop price at \$46, you mean? Mar 5, 2020 at 12:24