What is the difference between a stop-loss and and stop-limit order?

Answer 1

A stop loss turns into a market order once it's triggered. A stop limit turns into a limit order once it's triggered.

For example, a stop loss order to sell at $40 becomes a market order once the market trades at or below $40. The risk is that you'll sell in the hole if there is a tremendous amount of selling pressure. This type of order could be filled at ANY price.

A stop limit turns into a limit order once the market trades at or below $40. Your limit can be a price other than $40. For example, you might put a $39 limit on your stop so that you don't sell at the bottom of a big downdraft. The risk is that you'll miss the chance to sell at $35 as the stock is going down to $20.

Answer 2

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Answer 3

With a stop loss, if the security (or futures contract) trades at the stop price, a market order is created. That is, the broker executes the order at the best price he can get at that time.

With a stop limit, if the security (or futures contract) trades at the stop price, a limit order is created. That is, the broker executes the order at or better than the limit price, even if he has to wait.

Example: You own 100 CWTR and the current price is 23.20.
If you enter a an order "sell 100 CWTR 23.00 STOP" then if CWTR trades at 23.00 the broker tries to sell to the next bidder which may be at, above or below the 23.00.

Example: You own 100 CWTR and the current price is 23.20.
If you enter a an order "sell 100 CWTR 23.00 STOP LIMIT 22.95" then if CWTR trades at 23.00 the broker tries to sell to the next bidder which may be at, above or below the 23.00, but must be at least 22.95. If it can't be sold at 22.95, he sits there offered at 22.95 until the market rises back to that level.

So why wouldn't everone use stop-limit orders? Because in a fast moving market, possibly with a big gap, the stop-limit order might not get filled; the market need not go back to 22.95 just because you want it to. It could go sailing down to 10.00 and stay around there for years. At least with the plain stop, you get out quickly and the pain stops.

Answer 4

Just wanted to say that both of these are excellent answers. I avoid Stop Limits myself, because I do not want to miss a market and only trade liquid securities (and thus better execution prices). Stop Limits would be useful if you wanted to be patient and wait, as in if you were trading a less liquid market and did not want your order to impact, or move, the market.

Excellent question, and the 2 other answers say it all.

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