What is a stop sell limit order?

A stop sell limit order is a tactic to sell stocks by combining the stop order and stop limit orders. Not all brokers will perform a stop sell limit order. However, this tactic will give you very precise control over your selling prices.

In order to under stand the stop sell limit order you should first understand the limit order and stop order. Once you understand them separately, it will be much easier to understand when they are combined in a stop sell limit order.

Buy Limit or Limit Order
A buy limit order is useful for preventing you from overpaying for a fast-moving stock. For instance, if you want to purchase XYZ and the last time you looked the stock was trading at $25 per share then you could place a maximum limit on the amount you are willing to pay. If you limit the order at $27, then your stock broker will only execute the purchase if he can find a seller that is willing to sell the shares below $27.

Usually a limit order will have an expiration date. This prevents the order from being valid for too long and executing when you don't want it to. For example, if your limit order is valid for six months, the company could have some terrible news and declare bankruptcy. If you limit order is still valid, you may end up purchasing some stock when the price comes down when the stock market hears the bankruptcy news.

Stop Order
A stop order is used only after the stock has been purchased. You put a stop order on the stock you own to protect it from going too low. This is a way to keep your investment from shrinking too small. Another way to say it would be to limit your risks or even a type of insurance.

A sell stop is an order to sell a stock if it drops below a specified price. If you purchase a stock at $25, you can put a sell stop at $20 so that if the price drops to that point, your broker will automatically sell in order to limit your losses. However, the stop order won't guarantee you will get that price. For example, if bad news hit the company during the night when the exchange is closed, the stock might open the following morning at $18. Your sell stop limit would be triggered so your stock would sell, but you would only get $18 per share.

Stop Sell Limit Order
An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to sell at the limit price or better.

The primary benefit of a stop-limit order is that the trader has precise control over where the order should be filled. The downside, as with all limit orders, is that the trade is not guaranteed to be executed if the stock/commodity does not reach the limit price.

For example, let's assume that XYZ is trading at $50 and an investor has put in a stop-limit order to sell with the stop price at $45 and the limit price at $44. If the price of XYZ moves below $45 stop price, the order is activated and turns into a limit order. As long as the order can be filled above $44 (the limit price), then the trade will be filled. If the stock gaps down below $44, the order will not be filled.

In summary, a stop sell limit order will help you protect your stock investment. It will help you sell at the precise prices you want instead of the market prices. However, you are not guaranteed a transaction if your specifications are not met.

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Categories: Buying and Selling Stocks,

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