What is a Stop-Limit Order?
Stop-Limit Order Definition
A Stop-Limit Order is a trade that takes place over a specific span of time that combines the feature characteristics of a stop and a limit order for the purpose of mitigating risk that might exist within a stock trade.
Stop-Limit Order Explained
So first what does a “Stop”mean in the world of stock trading?
-A stop is an instruction given to buy a share once the price of the stock reaches a certain price point.
Second, we now need to understand what a limit order is.
-A limit order is an instruction to stop buying a share when the price is better than or equal to a certain price point.
Combine the two, and what you get are two price points.
A high and a low.
As a result, a stock trader then has the benefit of “pre-set”control of when his/her share is bought.
However, this control only lasts for so long because a trader before issuing the order must set a time limit in which the order will remain in effect.
Which could mean that the share never gets bought if the price never reaches the stop price point by the time it runs out.
Example of a Stop-Limit Order
As an example, let’s assume that Google (GOOG) is trading at $150 and an investor is interested in investing once the stock price reaches $170, but not after it reaches $185.
As a result, the investor will issue a stop-limit order that will automatically fill once the price of Google’s stock reaches $170 and stop once it reaches $185.