Legal Definitions - stop-limit order

A stop-limit order is a type of stock market order that combines the features of a stop order and a limit order. It is an instruction given by an investor to a broker to buy or sell a stock when it reaches a certain price (the stop price) and to execute the trade at a specific price (the limit price) or better.

For example, if an investor owns shares of XYZ stock that are currently trading at $50 per share and wants to sell them if the price drops to $45, they can place a stop-limit order with a stop price of $45 and a limit price of $44. If the stock price falls to $45, the order becomes active, and the broker will try to sell the shares at $44 or better. If the stock price drops below $44, the order will not be executed, and the investor will continue to hold the shares.

Another example is an investor who wants to buy shares of ABC stock but only if the price drops to $20. They can place a stop-limit order with a stop price of $20 and a limit price of $21. If the stock price falls to $20, the order becomes active, and the broker will try to buy the shares at $21 or lower. If the stock price rises above $21, the order will not be executed, and the investor will not buy the shares.

Stop-limit orders are useful for investors who want to limit their losses or protect their gains. They are commonly used in volatile markets where stock prices can fluctuate rapidly.