Stop Limit Orders

Updated on March 13, 2019

A Stop Limit Order tells your broker to buy or sell a stock at a specific price. A Stop Limit Order is a combination of a Stop Order and a Limit Order. This is why when you use a Stop Limit Order, you will need to set a stop price and a limit or act price. Along with these two prices you will also need to set the amount of shares.

Stop and Limit Price

The stop and limit price will be below or above the stock’s current price depending on if you are wanting to buy or sell the stock. If the stock’s current price reaches the stop price, your order will be activated and turned into a limit order. The limit or act price will then tell your broker the minimum or maximum price you are willing to buy or sell the stock for. Let’s look a little deeper into buying and selling a stock using a Stop Limit Order to get a better understanding of how it works.

Selling With a Stop Limit Order

When using a Stop Limit Order to sell a stock, you will set the stop and limit price BELOW the current stock price. This allows you to minimize losses or to lock in profits when the price of a stock you already own is decreasing. Using a Stop Limit Order to sell a stock, tells your broker to get ready to sell after the price reaches your stop price. Once this stop price is reached, your Stop Loss Order automatically turns into a Limit Order that sells the stock only at your limit price or better.

As an example, assume you bought a stock for $100 a share and the current stock price is $150 a share. If you wanted to protect some of your profit from a potential decrease in stock price, you could set a Stop Limit Order to sell your stock with a stop price of $135 and limit price of $130. With this order in place, if the price of the stock decreases to $135, your order will be activated and turned into a limit order. Your broker will then attempt to sell your stock at your limit price of $130 or better. If your broker cannot find a buyer of your shares for $130 or higher, your order will not be executed and you will still own the stock. If you are trading multiple shares at once, your order can also be partially filled if there are not enough traders willing to buy all of your shares at your limit price or better.

Buying With a Stop Limit Order

When using a Stop Limit Order to buy a stock, you will set the stop and limit price ABOVE the current stock price. This allows you to buy a stock that is building upward momentum, with an intuition that this a sign the stock price will continue to rise. Using a Stop Limit Order to buy a stock tells your broker to buy after the price reaches your stop price. Once this stop price is reached, your Stop Limit Order automatically turns into a Limit Order that buys the stock only at your limit price or better.

As an example, you want to buy stock of Chelsea’s Coffee but only after it shows some serious upward momentum in stock price. If Chelsea’s Coffee is currently trading at $50 a share and you wanted to buy it after shows some positive momentum, you could set a Stop Limit Order to buy your stock with a stop price of $55 and limit price of $57. With this order in place, if the price of the stock increases by 10% to $55, your order will be activated and turned into a limit order. Your broker will then attempt to buy Chelsea’s Coffee stock at your limit price of $57 a share or better. If your broker cannot find a seller willing to trade their shares for $57 or lower, your order will not be executed and you will not own the stock. If you are looking to buy multiple shares at once, your order can also be partially filled if there are not enough traders willing to sell at your limit price of $57 or better.

Why Not Just Use a Limit Order?

So you may be wondering, why not just use a limit order? The main reason for using a Stop Limit Orders instead, is that you can buy or sell a stock ONLY after the stock price has shown you a certain type of movement.

For instance, if Chelsea’s Coffee is still currently trading at $50 a share and you submit a Limit Order to sell at $45, it will immediately execute because selling at $50 is better than selling at $45. If instead you were to submit a Stop Limit Order to sell the stock with a stop price of $47 and a limit price of $45, your broker will wait until the price falls to $47 before looking to sell your stock.

This same comparison works buying a stock. For instance, if Chelsea’s Coffee is still currently trading at $50 a share and you submit a Limit Order to buy at $57, it will immediately execute because buying at $50 is better than buying at $57. If instead you were to submit a Stop Limit Order to buy the stock with a stop price of $55 and a limit price of $57, your broker will wait until the price rises to $55 before looking to buy the stock.