A stop-limit order is an instruction given to a broker that combines directives from two different types of market orders: the stop order and the limit order. A stop-limit order directs a broker to buy stock above a certain price, while a limit order prevents purchases above a second price.Continue Reading
Stop-limit orders give traders very precise control over how their trades are executed. If a trader notices a company trading at a stable but low price, the decision can be made to buy shares in the company only when it begins to show significant upward momentum. He can stop when it is in danger of becoming overvalued.
If Company A is trading at $25 a share, and the price has remained stable for a long time but the company shows signs of increased profitability, traders can place stop-limit orders for the stock. A stop-limit order of $30 and $40 in this case instructs brokers to begin buying stock in Company A when its share price begins to climb above $30, signalling a long-term rise. If the trader believes Company A's natural share price is $40, the limit order prevents further purchases of stock at that point, and it may even direct the brokerage to automatically sell at the specified price.Learn more about Investing