Stop-Limit Order: Meaning, Types, Features & Importance
Trading stocks attract significant risks of loss to investors. Traders use several ways to manage their investment to assure maximum profit. Several types of trade orders are used by investors to set a target price and to minimise losses during a risky trading session.
Stop-Limit order is a combination of stop and limit orders to ensure a desired price while buying or selling a stock. However, it does not offer a guarantee of execution of the trade. To understand the features of stop-limit order, follow the information below.
What Is the Meaning of Stop-Limit Order?
When you place a buy/sell order where the lowest/highest acceptable price is specified, it is known as a Stop-Limit Order. It is a mix of a stop order and a limit order; When the stop price decided by you gets triggered, the trade is executed at the best available price above/below (depending on the trade taken) the stop price but within a set limit price. Stop-limit order for selling has a lower stop and limit price than current market price.
A stop-limit order helps in risk management for investors who actively trade on a short-term basis. Like a stop order, stop-limit is also a stop point; however, it also has a range or limit, hence, it is called a stop-limit order.
How Do Stop-Limit Orders Work?
When you are placing a buy order, you have to place a stop price and limit price above the market price. When this stop price is crossed, the trade is executed at the best rate between the stop and limit price. Similarly, you need to set a stop and limit price below the market price for a sell order.
However, there is no assurance of success of a stop-limit trade. The order is cancelled at the end of the day if the order price does not get triggered. Also order will not be fulfilled in case of a gap-up or gap-down opening, however the order will be placed and executed when the price reaches the limit price
What Are the Features of Stop-Limit Order?
Here are the features of stop-limit orders:
- Stop-Limit is a risk management trading tool.
- It is a trade order with features of stop and limit orders.
- This order is executed at the best market rate within the set price limit.
- It is usually valid for a day.
What Are the Types of Stop-Limit Orders?
There are two types of stop-limit orders in a trading exchange:
- Buy Stop-Limit Order
You can buy stocks by placing buy orders with a stop-limit to get the most effective price during a volatile session. Stop and limit prices in a buy order are placed above the current market price. This helps when you have a short trade and the market moves against your position.
- Sell Stop-Limit Order
If you want to sell stocks in a volatile market, place stop-limit orders to get the best possible price. Stop and limit prices for a sell order are placed below the current market price. This helps when you have a long trade but the market falls.
What Is the Importance of Stop-Limit Order?
Stop-limit order helps you control a stock’s loss limit and execute the trade at desired price. It is effective if you plan to trade a stock with high price fluctuations.
What Is the Difference Between Stop-Limit and Stop-Loss Order?
The differences between stop-limit and stop-loss orders are mentioned below.
|Stop Loss Order
|It does not guarantee execution. Stop-limit orders can be cancelled at the end of a day if they are not executed.
|Stop-loss guarantees execution of an order at the set price.
|Stop-limit triggers a limit order when the stop price is activated.
|Stop-loss triggers a market order when the stop price is hit.
Example of a Stop-Limit Order:
Let’s take an example of a buy stop-limit order to understand the concept better.
Suppose the price of company ABC’s shares is currently Rs. 100 and you have a short trade on ABC’s stock. Let’s say that you want to put a stop loss in place and buy shares when they touch Rs. 105 but you want to give some room for stock to move. At the same time you don’t want to continue the trade if the price moves above Rs. 110. In this case you can place a buy stop-limit order with a stop price of Rs.105 and limit price of Rs. 110. In case of a gap up opening above Rs. 110, this order will be triggered but will not be executed. The order will be placed at a price between Rs. 105 to Rs. 110 and will be executed if the price comes down to this range.
Sell stop-limit order will work in the exact opposite manner of this order.
Stop-limit order works as a price-controlling tool for investors during a trading session. In a volatile market, it locks the trade at a desired price for the investors and helps to manage losses.
It initiates a limit trade once the stop price is achieved; hence, it is called stop-limit order. It is an extension of a stop-loss order, but it is important to understand which trade order is useful for you based on your trade objective.
Frequently Asked Questions
What are the three main types of orders in stock market trading?
The three main types of orders in stock market trading are market order, stop order and limit order. These orders are placed and executed based on the needs of an investor.
What are the types of stop orders?
The primary types of stop orders in trading are stop-loss and stop-limit orders.
What are the types of limit orders?
Limit orders are primarily of four types – buy limit, sell limit, buy stop and sell stop orders.
Which is better – stop or limit order?
Stop and Limit orders are two types of trade orders offering different sets of benefits to different investors. Hence, it is not comparable or to justify any one as better.