Stop Limit Orders: The “2-For-1” Stock Order Type That Puts You In Control Of Your Trade

I once worked with a guy who was a bit of a control freak. It wasn’t a huge deal around the office. But I felt super awful for his wife.

His control freakiness seemed to be at its worst when it came to household finances. He got pissed off whenever his wife went shopping and bought things without his permission. Needless to say it caused a wee bit o’ tension in their relationship.

It all came to a head one day at a McDonald’s. They stopped off to pick up lunch on their way home. She ordered a cheeseburger. But he told her she couldn’t get the cheeseburger. She had to order a hamburger. If she wanted a cheeseburger, they had cheese at home she could add to her hamburger if she wanted a cheeseburger.

Yeah, they ended up divorced.

Clearly that’s going overboard when it comes to control. However, if you wanna be a control freak about your stock trades, there’s nothing wrong with that.

And, to get as much control as possible over your stock trades, consider using a Stop Limit Order.

What Is a Stop Limit Order?

A stop order limit is – wait for it – a combination of a stop order and a limit order.

A stop limit order is kind of the “2-for-1 special” of stock trades. With most stock trades (a stop order OR a limit order) you set a stop/limit price.

With a stop limit order, however, you get to set 2 prices. The stop price AND the limit price.

(Quick recap:

A stop order is when your shares are bought or sold only after they get to the stop price you set.

A limit order is where you set the max price you’re willing to buy shares for or the minimum price you sell them for.)

The way a stop limit order works is that once your stop price is reached, your trade is activated. At that point it’s converted into a limit order. Which means you also set a limit price. That’s the price your shares will be bought / sold at.

An Example of a Stop Limit Order

We’ll take sell stop limit orders first. You own shares of Amazing Zoolander Fashions (ticker symbol AZZ). AZZ is currently sitting at $45 a share but you think it’s gonna start to sag on the next earnings report. To protect your backside downside, you put in a stop limit order to sell shares of AZZ if it declines.

You decide to put in your stop price at $40. So, if AZZ drops down to $40 a share, your trade goes live. Meaning it’s now a limit order.

Along with the stop price, you put in a limit price of $35 a share. That tells your broker that $35 a share is the lowest share price you’re willing to sell at.

What all this means is that if the share price of AZZ blows below $40 but your trade cannot be executed by the time the shares hit $35, your order will not be filled. At that point, you hope AZZ’s share price gets back to $35 or higher where you can try selling them again.

A buy stop limit order works the other way. You have a feeling AZZ is on the upswing and you wanna jump on that AZZ if it does.

Shares are at $45 and you put in a stop limit order. Your stop price is $50. So if AZZ rises to $50, your order is live. You set your limit price at $55 because you think if it goes higher than that, it’s more than you want to pay. In this case, if shares hit $50 and your order can be executed before they hit $55, then you’ve got your AZZ. If not, your order won’t be filled.

The Benefits

By setting both a stop price and limit price, stop limit orders give you about as much control as possible over when your order to buy/sell gets filled and at what price it gets filled at.

This order type is commonly used as a way to either lock in profits or limit downside losses on stocks you own.

It’s a great to use when price is your priority. A stop limit order greatly reduces your risk of your trade getting executed at a bad price. This is especially the case when trading in very turbulent markets and stocks where shares prices are moving quickly. And even more of a help when trading stocks with lower trading volumes.

Stop limit orders can be a huge money saver when you’re dealing with a stock that’s very volatile.

The Downsides

Because it’s a limit order, there is no guarantee your order will be filled. The stock price has to reach the limit price or better for that to happen.

Also, your order may not be totally filled. If you want to sell 100 shares at $45 a share but there’s only a buyer for 60 of them, then you’ll sell the 60 but still have 40 shares left unless other buyers can be found at your limit price (or better).

Length of a Stop Limit Order

As with other trades, you can specify how long your stop limit order is good for. You can make one that only is in force until the end of a day. Or you can make it Good Til Cancelled where it’ll be in force til you cancel it (just check with your brokerage because Good Til Cancelled orders may automatically expire after 90 or 180 days if they are not triggered)