A stop-limit order is a brokerage order that combines the attributes of a stop order and a limit order. It is designed to give the buyer or seller better odds of trading at a desired stock price. The stop aspect of the order allows a trader to specify at what price a stock should be bought or sold. The limit aspect of the order allows a trader to specify that a stock should be bought or sold only within a certain price range. Combined, the two may give an investor greater control over stock trades and diminish the chances of becoming victim to unforeseen ups and downs within the market.
By itself, a stop order is given to a stock broker to specify at what price a stock should be bought or sold. When that price occurs, the order is executed as a market order. Although this tactic gives the trader more control, it can be risky: between the time when the desired price is reached and the time when the market order is able to be filled, the stock may fluctuate, causing one to end up with an undesirably priced stock.
A limit order, on the other hand, is a brokerage order that specifies an acceptable price range in which to trade a stock. Using this trading method, a stock can't be bought or sold unless it falls above or below a specified price. This also can help decrease the chance of a stock going untraded, which, for example, can happen when a stop order fails to reach its specified price.
Adding a limit order to a stop order, creating a stop-limit order, helps diminish the risk of being adversely affected by swiftly changing stock prices. A stop-limit order lays out more parameters for what price a stock can be traded at, and if not at a certain price, then in what price range. This helps to prevent a trader from being stuck with a far cheaper or more expensive stock than intended, a possibility when relying solely on stop orders. A stock can also be traded twice using only one stop-limit order. For example, a stock may be bought or sold when it reaches the stop order price, and quickly traded again if it hits the limit price.
A stop-limit order is a convenient tool for one who may be unable to carefully monitor market fluctuations for a period of time. Using it, the trader is able to buy or sell at a price without having to know when a particular price is reached. Brokers sometimes charge extra for stop-limit orders as well as for other special brokerage orders.