Stop limit order
A stop limit order combines the features of a stop order and a limit order. When the stock hits a stop price that you set, it triggers a limit order. Then, the limit order is executed at your limit price or better. Investors often use stop limit orders in an attempt to limit a loss or protect a profit, in case the stock moves in the wrong direction.
Keep in mind, short-term market fluctuations may prevent your order from being executed, or cause the order to trigger at an unfavorable price. For example, if the market jumps between the stop price and the limit price, the stop will be triggered, but the limit order will not be executed.
Also, once your stop order becomes a limit order, there has to be a buyer and seller on both sides of the trade for the limit order to execute. If there aren’t enough shares in the market at your limit price, it may take multiple trades to fill the entire order, or the order may not be filled at all.
With a buy stop limit order, you can set a stop price above the current price of the stock. If the stock rises to your stop price, it triggers a buy limit order. Shares will only be purchased at your limit price or lower.
YOWL is currently trading at $5 per share. You want to wait to purchase YOWL because you think it’ll fall to a lower price. You also think that if YOWL reaches $8 it may go higher. To help minimize your potential costs, you set a stop price at $8. You also don’t want to pay more than $8.05 for YOWL, so you set a limit price at $8.05.
With a sell stop limit order, you can set a stop price below the current price of the stock. If the stock falls to your stop price, it triggers a sell limit order. Shares will only be sold at your limit price or higher.
YOWL is currently trading at $10 per share. You want to wait to sell YOWL because you think it’ll rise to a higher price. To help protect yourself in case YOWL reverses itself and begins falling, you set a stop price at $8. You also don’t want to receive less than $7.95 per share of YOWL, so you set a limit price at $7.95.
The examples included in this article are for illustrative purposes only. In general, understanding order types can help you manage risk and execution speed. However, you can never eliminate market and investment risks entirely. It’s usually best to choose an order type based on your investment goals and objectives.
All investments involve risks, including the loss of principal. Investors should consider their investment objectives and risks carefully before investing.
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