Ever wondered what a stop-limit order is? What does it do? Why would you want to use one, and when should you avoid them altogether? You’re not alone. It’s a super common question because, quite honestly, just the phrase “stop-limit” sounds too confusing to start with.

So...what is it? It's an order to buy or sell securities at a specified price. A stop-limit order is used when you don't want the trade to occur at market rates, but instead, limit your risk by specifying both the "stop" and "limit" prices. Essentially, this type of trading strategy allows investors to control how much they are willing to lose in addition to setting the price at which they wish to buy or sell their shares.

Let's say you wanted to purchase shares of Apple right now. You could place an order with your broker for $200 per share, which would allow you to buy more shares than if you just set a fixed price. However, understanding stop-limit orders is a bit more complex than just setting a stop or limit price. Here’s what to know and how to use these orders as part of your investment strategy.

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What is a Stop-Limit Order?

As mentioned above, a stop-limit order is an order to buy or sell a security at a stop price or better, but never higher than the limit price that you set. For this reason, stop-limit orders are often referred to as stop-and-limit orders.

Most stop-limit orders include two prices: stop and limit. Seems simple enough, right? For stop-limit orders, the stop represents where the stop order becomes a market order, and the limit price serves as an upper or lower boundary preventing trades higher than your set limit price.

What’s really important to understand with these kinds of orders is that it doesn’t guarantee that a trade will be made. This is the case with a stop-limit order in the same way that it’s the case with a limit order. Just because it gets triggered doesn’t mean that it will result in an order execution.

Recap: A stop-limit order is a way for investors to mitigate risk. How? You specify the highest or lowest price you’re willing to buy or sell a stock at so that you know you won’t be trading outside of your limits.

How to Place a Stop-Limit Order

More than understanding how to place a stop-limit order, it’s important to understand what placing a stop-limit order actually does. When you place a stop-limit order, that order gets sent to the exchange and put on an order book. It’ll stay there until the stop gets triggered, you cancel it, or the order simply expires.

Here’s a real world example of a stop-limit order to help you understand how it might work. Let’s assume you want to invest in Apple and the current stock price is $170. Now, you don’t want to purchase it that low, but you also don’t want to keep monitoring the price until it hits your stop price.

You would pick both a stop and a limit price. For this example, let’s say that’s $175 and $180. You would make a stop-limit order with a stop price of $175 and a limit price of $180. This means that if the price of Apple stock goes above $175 during the timeframe of your stop-limit order, it will automatically trigger a buy and turn into a limit order. As long as the order can be completed below the limit price of $180, the trade should be completed.

Stil, though, if you have a brokerage account then how do you place a stop-limit order? First, you’ll need to research the trade to understand where you should set the stop and limit prices. Keep reading to learn more about that.

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When to Use a Stop-Limit Order

When should you use a stop-limit order? It’s best to use this kind of order when you expect a certain stock to gain momentum. Usually, stock-limit orders to buy are placed above the market price when you make the order; stock-limit orders to sell are placed below the market price.

If you’re literally asking when to place a stop-limit order, then it’s important to know that these kinds of orders will only get triggered during standard market session hours. This is between 9:30 am and 4:00 pm EST. 

You get to decide how long your stop-limit order is effective for. You can set it to only be effective during the current market session. Or, you can set it to extend throughout other market sessions as well. If you don’t want to set a specific timeframe then you’ll wanna make a good-til-cancelled order. Those will be good until you manually cancel them or, in most cases like with Schwab, for up to 60 calendar days.

Why Investors Use Stop-Limit Orders

If you’re conscious about how you’re trading and want to automatically trigger trades when a stock reaches a specific price, stop-limit orders are a good way to do this. For example, if you’ve been able to identify a pattern and want to jump on that when a stock moves above or below its current price, stop-limit orders are the way to go. 

Buy Stop-Limit Orders

Investors tend to use buy stop-limit orders to help control the price they pay for a stock. To do this, you’ll have to decide the maximum price per share you’d be willing to pay. If the price of the stock goes up to the stop price, it will trigger an order to buy. 

Likewise, because you’ll have set a limit price, you’ll also have already specified the maximum amount you’d be willing to pay for each share. This just helps ensure that your stop limit doesn’t trigger a buy and then, before the order goes through, you end up paying way more than you wanted to for the stock.

Sell Stop-Limit Orders

Investors use sell stop-limit orders to sort of automatically sell shares when they fall below a certain price. Again, because you hopefully understand how trading and trends work, the idea here is that you’ll have set an ideal limit to how long you want to hold onto a specific share. If it drops below that limit, because you’ve done your research, you’ll know that it’s time to sell.

With a sell stop-limit, the stop price is the price that activates the order to sell. The limit price is the lowest price you’d be willing to accept from a buyer. The key here is to ensure that when you place the order, both the stop and limit price should be below the current bid price.

Are There Risks Involved with Stop-Limit Orders?

Yes, there can be risks involved in making stop-limit orders. Mostly, the risks are for partially fulfilled orders and for orders that don’t get executed. With partial fills, you’re running the risk of racking up high commission fees. 

With a non-executed order, there’s no “risk” involved necessarily on your part aside from the fact that the order simply won’t go through. This tends to happen when orders placed ahead of yours use up all of the available shares.

Understand How to Use Stop-Limit Orders as Part of an Investing Strategy

While you can read books on how to invest, learning the art of investing truly comes from understanding that investing is a science. The science consists of determining what the total value of a business should be based on applying a multiple to the expected revenue, profit, and free cash flow that the business will generate. Stop-limit orders can be a part of that, but they’re not the whole thing.

How do you learn all of this? By learning from actual experts, by listening to experienced investment pros. When you download the Wealth Stack app, this is what you gain access to. You can access numerous free video courses that will help you learn how to invest.

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