A stop-limit order is triggered as a limit order after the stop level has been hit or exceeded. Thus, for such orders, two price levels must be specified, namely the stop level and the limit.
Example sentence: ‘Am I glad I set this stop limit. It got me the shares at the exact price I was hoping for’.
You may also want to look up stop-loss orders if you have not already.
Why use a stop limit order?
Setting a limit is intended not to pay too much or receive too little once the set stop level has been hit or broken. This is because the limit with a buy order is higher than the stop level, with a sell order the limit is lower than the stop level.
Example when buying
Suppose you want to sell a certain stock when it reaches a stop level of € 50.00. The limit price can then be set at €49.95. If the share price becomes €50, your shares will be offered at the price of €49.95.
Example when selling
If you want to buy a certain share from a stop level of € 50, you can set a limit of, for example, € 50.03. As soon as the stop level of € 50 is reached, your order for the shares will be placed for an amount of € 50.03.
Disadvantages of a stop limit order
It is possible that if your limit price is too far from the buy or sell price, your order cannot be executed. That will hinder the purchase or sale of your shares and can have a negative effect.
Investing Guides warning: Although this method will allow precise control over your orders, there is no guarantee they will ‘trigger’ a.k.a execute. Meaning you can be missing an opportunity.
Then again, never try to time the market. These orders can be set today, week, or even longer. So do not worry about catching that one chance, you can be there for the next!
Continue learning by having a look at the complete glossary, or by reading the basics!