A stop limit order combines features of a stop order and a limit order. When the stock reaches the stop price, a limit order is triggered instead of a market order.
How stop limit orders work
A stop limit order has two price components:
- Stop price: The price that triggers the order
- Limit price: The maximum (for buys) or minimum (for sells) price at which the order can execute
Example
You own shares of ABC stock at $100. You want to sell if it drops, but you don't want to sell below $94.
- You set a stop price of $95 and a limit price of $94
- If ABC drops to $95, a limit sell order is placed at $94
- Your shares will only sell at $94 or higher
When to use a stop limit order
Stop limit orders work best when:
- You want price protection that a regular stop order doesn't provide
- You're trading volatile stocks where prices can gap significantly
- You're willing to accept that your order may not execute if the price moves past your limit