Legal Definitions - stop-limit order

A stop-limit order is a specific instruction given to a financial broker to buy or sell a security, such as a stock, that combines two distinct conditions: a "stop price" and a "limit price."

Here's how it works:

• First, the investor sets a stop price. If the security's market price reaches or falls below (for a sell order) or rises to or above (for a buy order) this stop price, the stop-limit order is activated.
• Once activated, the stop-limit order immediately transforms into a limit order. This means the trade will only be executed at the investor's specified limit price or a better price. For a sell order, "better" means at or above the limit price. For a buy order, "better" means at or below the limit price.

The key difference from a simple "stop order" is that a stop-limit order provides more control. A regular stop order, once triggered, becomes a "market order" and will execute immediately at whatever price is available, which could be significantly worse than expected in a fast-moving market. A stop-limit order, however, guarantees that if the trade executes, it will be at a price no worse than the specified limit price, even if it means the order might not be filled at all if the market moves too quickly past the limit price.

Investors commonly use stop-limit orders to manage risk, protect profits, or enter positions at desired price levels.

Examples:

• Limiting Potential Losses on a Stock Investment:

  An investor, Maria, owns shares of "Global Tech Solutions" (GTS) currently trading at $120 per share. She's concerned about a potential market downturn and wants to sell her shares if the price drops, but she doesn't want to sell below $105 per share. To achieve this, Maria places a stop-limit order to sell GTS with a stop price of $110 and a limit price of $105.

  How it illustrates the term: If GTS's price falls to $110, Maria's stop-limit order is triggered and becomes a limit order to sell at $105 or higher. If the price then continues to drop rapidly, for instance, falling to $100, her shares will *not* be sold because the market price is below her specified $105 limit. This protects her from selling at an unacceptably low price, even though it means she might still hold the shares if the price drops too far too fast.

• Buying a Stock on an Uptrend Without Overpaying:

  David is interested in buying shares of "Innovative Health Inc." (IHI) if its price shows signs of breaking out of a trading range, indicating an upward trend. IHI is currently at $75. He believes a breakout above $78 is significant, but he doesn't want to pay more than $80 per share. David places a stop-limit order to buy IHI with a stop price of $78 and a limit price of $80.

  How it illustrates the term: If IHI's price rises to $78, David's stop-limit order is activated and becomes a limit order to buy at $80 or lower. If the price then quickly jumps to $82, his order will *not* be filled because the market price is above his $80 limit. This prevents him from buying at a price he considers too high, even if it means missing the opportunity if the stock surges rapidly past his limit.

• Protecting Profits on a Volatile Asset:

  Sarah owns shares of "Dynamic Energy Corp." (DEC) which she bought at $30, and it's now trading at $90. She wants to lock in most of her profits but is worried about a sudden downturn. She's willing to let it drop a bit but doesn't want to see her profit fall below $50 per share. Sarah places a stop-limit order to sell DEC with a stop price of $70 and a limit price of $65.

  How it illustrates the term: If DEC's price falls to $70, her stop-limit order is triggered and becomes a limit order to sell at $65 or higher. This ensures that even if the stock experiences a sharp decline, she will not sell her shares below $65, guaranteeing a substantial profit from her original purchase price of $30. If the price drops to $70 and then quickly falls to $60, her order will *not* execute, protecting her from selling at $60, but also meaning she still holds the shares at the lower price.