Stop-Limit Order - Explained
What is a Stop-Limit Order?
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Table of ContentsWhat is a Stop-Limit Order?How Does a Stop Limit Order Work?How Stop-Limit Orders WorkFeatures of Stop and Limit OrdersReal World Example of a Stop-Limit Order
What is a Stop-Limit Order?
A stop-limit order which is used to mitigate risk can be defined as a conditional kind of stock trading incorporating the features of a stop order and a limit order over a specified time frame. The stop price is simply the price triggering a limit order, and the limit price is the unique limit order price triggered. Once a stock hits the stop price, it automatically triggers a limit order to buy/sell. The stop-limit order can also be triggered once the defined target stops price. The stop-limit order is used by most online brokers because it is an option available when dealing with them.
How Does a Stop Limit Order Work?
- A stop-limit order is a conditional kind of stock trading incorporating the features of a stop order and a limit order over a specified time frame.
- For a stop-limit order to work, two types of price points must be specified - a stopping point and a limit point.
- The stop-limit order is beneficial to the trader because it enables him to have total and precise control over the filling of all orders.
- Trading is stopped immediately pricing gets unfavorable according to the limit set by a trader.
- The trader is not assured of the executability of the trade if the stock has not gotten to the point of the set stop price during the set timeframe.
How Stop-Limit Orders Work
For a stop-limit order to work, two types of price points must be specified - a stopping point, which indicates where the price targeted for the trade starts; and the limit which is outside the price targeted for the trade. After the price points have been successfully set, the timeframe in which the trader expects the stop-limit to be executed must also be set. This order is beneficial to the trader because it enables him to have total and precise control over the filling of all orders. Despite this huge benefit of the stop-limit order, the trader is not assured of the executability of the trade if the stock has not gotten to the point of the set stop price during the set timeframe.
Features of Stop and Limit Orders
A limit order is an order to buy or sell a security, at or better than a specific price. A buy limit order can be executed only at or below the limit price, and a sell limit order can be executed only at or above the limit price. A stop order also referred to as a stop-loss order, is an order to buy or sell a stock as soon as the price of the stock exceeds the stated price, known as the stop price. When the stop price is hit, the stop order becomes a market order. Trading is stopped immediately pricing gets unfavorable according to the limit set by a trader when a stop order and limit order are used together in trading.
Real World Example of a Stop-Limit Order
Taking the assumption that an investor is willing to purchase stocks from Apple Inc. (AAPL) which is trading at $170, immediately AAPL's stock starts to show a serious upward movement. A stop-limit order has therefore been set by the investor to terminate purchase the stock at $180 stop price and $185 limit price. The order is triggered and converted to a limit order immediately the stock price is greater than the $180 stop price. The trade will be filled in as much as the order can be filled under the limit price of $185. On the other hand, the order will not be filled if the stock rises above $185.