investing
Stop-limit orders
August 01, 2018

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.

  • Stop-limit orders for short-sellers

    On the other hand, short-sellers can also use stop-limits to buy back shares and limit losses. In short-selling, investors sell securities they don't own when they anticipate a decline in the stock value. But if the stock unexpectedly rises? Buy stop-limit orders may help in reducing risk.

    Let’s use an example to explain.

    Example - buy stop-Limit (short investors):

    Suppose Stu shorted 200 shares of XYZ at $16 per share. He believes that the price of the stock will steadily drop in value, however, he wants to limit his losses in case the value of the stock increases in value beyond a certain point. Stu logs in to his trading platform and places a stop-buy limit order as follows:

    • Buy 200 XYZ at $18 stop, $18.50 limit

    If the share price increases in value from $16 (current stock price) to $18.00 (stop price), the stop order will trigger, and as a result, a limit order will be created to buy 200 shares at $18.50 (stop-limit) or less.

  • Important to know

    Here are some key points you should know about stop-limit orders:

    • Stop limit orders are not guaranteed to execute
    • When buying shares using stop-limit orders, your trades get executed when your limit price matches the market’s ask price. When selling, your limit price is executed when it matches the market’s bid price
    • You can use stop-limit orders on both Canadian and U.S. exchange-listed securities
    • Using stop limit orders may help you avoid ECN fees.
    • Stop limit orders cannot be used with the GTEM order duration for pre- or post-market trading

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