A stop-limit order combines a stop order with a limit order. With this order type, you enter two price points: a stop price and a limit price. If the market value of the security reaches your stop price (first price point), it automatically creates a limit order (second price point), as long as it happens within the specified duration time.
Let use some examples to make it easier to understand.
Example 1 - sell stop-limit (long investors): Suppose Wendy bought 200 shares of XYZ at $13 per share. She believes the price of the stock will steadily rise in value; however, she wants to limit her potential losses in case the stock price drops. Wendy logs in to her trading platform and places a stop-limit order as follows:
- Sell 200 XYZ at $12 stop, $11.75 limit
If the share price drops to $12 (the stop) at that point, a limit order will be created to sell 200 shares at $11.75 or higher. The stock will not be sold for anything less than the limit price which in this case is $11.75, but keep in mind that limit orders are never guaranteed.
Example 2 - sell stop-limit (long investors): Suppose Adam bought 100 shares of XYZ at $26 per share. He’s expecting the security to increase in value, but to protect his trade from potential losses he decides to place a stop-limit order as follows:
- Sell 100 XYZ at $24 stop, $23.75 limit
If the share price drops in value from the current price of $26 to $24.00 (stop price), a limit order will be created to sell 100 shares at $23.75 (stop-limit) or higher. In other words, once the stop is triggered, the stock will only be sold for $23.75 (limit) or higher. Again, keep in mind that limit orders are never guaranteed to execute.