One of the problems with using a stop-limit order to sell a security is there is no assurance you'll get the price that you want. For example, if you buy a stock at $45 and place a stop-limit to sell at $40, you're placing a conditional order that only gets executed if the conditions of the trade are met. For your stop-limit order to be filled, it will need to meet the parameters you set regarding the target price for the trade, the outside price for the trade, and a specified time frame.
While a stop-limit order gives traders more control over the conditions of the trade, it does not act as a guarantee the trade will get filled. Here we review what constitutes a stop-limit order and some common reasons why your stop-limit order might not get executed.
Key Takeaways
- A stop-limit order to sell a stock combines a stop order with a limit order, meaning shares are sold only after they reach a specified price, with a limit on the minimum price the seller will accept.
- While using a stop-limit order gives investors more control over how their order will be filled, it's not a guarantee they'll receive the price they want.
- If there are no bids that meet the conditions of your stop-limit order, your trade will not get filled.
Stop Order vs. Stop-Limit Order
First, it's important to understand the differences between a stop order and a stop-limit order. While similar-sounding, the conditions for each order type are not the same.
Stop Order
If you establish a stop order to sell a stock, it means that the stock will be sold at or beneath a certain price. A stop order triggers a subsequent market order when the price reaches your designated point.
For example, if you own 500 shares of a company trading for $45 and you put a stop order in at $40, you are saying you will sell your shares at $40 or the best available price under $40. Your stop order could be executed at $40 on the dot. But if the market is falling fast, it may be executed at $38 or a range of lower prices as your shares are being sold off.
Stop-Limit Order
In contrast, investors who opt for a stop-limit order to sell a stock are looking to have more precise control over when the order should be filled by specifying a range of acceptable prices. A stop-limit order includes two prices:
- The stop price, which is the start of the specified target price for the trade
- The limit price, which is the outside of the price target for the trade.
The stop-limit order will be triggered once the given stop price has been reached. The stop-limit order then becomes a limit order to sell at the limit price or better.In our example, with a stop-limit order, you could reduce the downward range by indicating you only want to sell your shares at a stop price of $42 with a limit price of $40.
An advantage of using a stop-limit order is that it can help the investor mitigate risk by locking in gains or limiting losses.
Why Some Stop-Limit Orders Don't Sell
To make the stop-limit order work in our above example, another person in the market has to bid somewhere in the range of your $42 stop price and $40 limit price for all 500 of your shares. However, if there isn't a bid—or a combination of several bids—then your order won't be executed. In widely traded stocks with high volume, this is usually not a problem, but in thinly traded or volatile markets, your order may not get filled.
Also, remember, shares don't necessarily go down incrementally like a thermometer. They can jump to certain prices if the bids and asks aren't matching up. It's possible for a stock to trade at $43 and then fall to $39 without touching the $42 mark.
In practice, however, this doesn'thappen very often and your stop-limit order will likely be filled either in a single tradeor over several trades as the stock price hovers around the $42 level. In short, a stop-limit orderdoesn't guarantee you will sell, but it does guarantee you'll get the price you want if you can sell.
FAQs
In short, a stop-limit order doesn't guarantee you will sell, but it does guarantee you'll get the price you want if you can sell.
Do stop-limit orders always work? ›
A stop-limit order is a trade tool that traders use to mitigate risks when buying and selling stocks. A stop-limit order is implemented when the price of stocks reaches a specified point. A stop-limit order does not guarantee that a trade will be executed if the stock does not reach the specified price.
Will a stop-loss always work? ›
While stop-loss orders can be useful, it's important to realize they don't always work as intended.
Do stop losses ever fail? ›
When the price drops or rises very fast, a market stop loss might execute at worse prices, and the limit stop loss might not execute at all. Check the next section to find out more about limit stop losses. Market orders are there to buy or sell something as fast as possible at the best available price right now.
Is my stop-loss guaranteed? ›
Under normal market conditions, the set Stop Loss is not guaranteed. When the market is volatile, the Stop Loss rate you requested may not be traded in the market. In this case, the Stop Loss will trigger at the next available rate. The result is that you could lose more than you were prepared to on the trade.
What are the disadvantages of a stop-limit order? ›
However, stop-limit orders have some disadvantages as well. One among them is the possibility of missed opportunities. The order might not be executed, and the investor would lose out on possible gains if the stock price rose quickly over the price limit.
Why didn't my stop-limit work? ›
Keep in mind, short-term market fluctuations may prevent your order from being executed, or cause the order to trigger at an unfavorable price. For example, if the market jumps between the stop price and the limit price, the stop will be triggered, but the limit order won't be executed.
Do stop-loss orders always get filled? ›
If the stock reaches the stop price, the order becomes a market order and is filled at the next available market price. If the stock fails to reach the stop price, the order isn't executed.
Do professional traders use stops? ›
One of the main reasons professional traders don't use hard stop losses is because they use mental stops instead. The advantage of this is that you don't have to 'give away' where your stop loss is by placing it in the market.
What is the golden rule for stop-loss? ›
The golden rule of Stop Losses is that they should never be moved away from the market once the trade is opened. If a trader feels that their stop loss is incorrectly placed, they are recognising that the foundations of their trade are incorrect and therefore they should close out.
In case of extremely less volume, where there are not enough buyers and sellers (referred to as an illiquid contract), the Stop Loss will not be executed as the stock may not have enough buyers/sellers at a defined stop-loss limit price by you for the order to be executed which is also known as 'Market depth'.
Why was my stop loss rejected? ›
If you place a stop order for too close to the current price, it'll be considered a mistake and immediately rejected. The price you enter when placing a stop-loss order must be at least $0.05 below the current Best Bid.
Does stop-loss automatically sell? ›
Stop Loss Order is a kind of tool that automatically triggers the sale of a certain security when its price reaches a particular level. It is called the stop price.
Can my broker see my stop-loss? ›
Market makers are allowed to see where stop-loss orders are placed because of the structure of financial markets and the role of market makers in facilitating trading activities.
Can you lose money with a stop-loss? ›
No guarantees: A stop-loss order is not a guarantee that you will receive the set price for your stock. It will only trigger the sale, which means you may get less than the stop price.
Do stop-limit orders work after hours? ›
Stop orders will only trigger during the standard market session, 9:30 a.m. to 4 p.m. ET. Stop orders will not execute during extended-hours sessions, such as pre-market or after-hours sessions, or take effect when the stock is not trading (e.g., during stock halts or on weekends or market holidays).
What are the problems with stop loss orders? ›
Potential Disadvantages
If a stock price suddenly gaps below (or above) the stop price, the order would trigger. The stock would be sold (or bought) at the next available price even if the stock is trading sharply away from your stop loss level.
Should you always do limit orders? ›
Bottom line. Your choice of market order or limit order depends on the specific circ*mstances of the trade, but if you're worried about not getting a certain price, you can always use a limit order. You'll ensure that the transaction won't occur unless you get your price, even if it takes longer to execute.
