Finra stop-limit order
Family II · Orders
Not to be confused with stop loss, limit order, stop order.
FINRA stop-limit order is a type of order that becomes a limit order once a specified stop price is reached. The order then seeks execution at the limit price or better, but it may remain unfilled if the market does not trade at that price or better. This order type is used to limit the risk of adverse price movement while also controlling the execution price.
How a stop-limit order works
A stop-limit order has two prices: a stop price and a limit price. When the market reaches the stop price, the order is triggered and becomes a limit order at the limit price. The limit price is typically set at or near the stop price, but the trader chooses both levels. Once activated, the order can only execute at the limit price or better. If the market moves past the limit price without trading at it, the order remains unfilled.
Stop-limit orders are used to enter or exit positions. For example, a trader holding a long position might place a stop-limit sell order to limit losses if the price falls. The stop price would be set below the current market price, and the limit price would be set at or slightly below the stop price. If the price falls to the stop price, the order becomes a limit order to sell at the limit price. If the price continues to fall without trading at the limit price, the order may not execute.
Worked example
Suppose a trader owns shares of a stock trading at $50 and wants to limit losses. They place a stop-limit sell order with a stop price of $48 and a limit price of $47.50.
If the price falls to $48, the order is triggered. If the market then trades at $47.50 or higher, the order can execute. If the price gaps down to $47 without trading at $47.50, the order will not execute and remains open.
Regulatory context
FINRA rules govern the handling of stop-limit orders by member firms. The specific handling of these orders, including whether they are triggered by last sale price or quote, can vary by broker and market. Traders should check their broker's order handling policies. Stop-limit orders are not guaranteed to execute, and the limit price may not be reached even if the stop price is triggered.
Often confused with
- stop loss
- A stop-loss order becomes a market order when the stop price is reached, so it executes at the best available price, whereas a stop-limit order becomes a limit order and may not execute if the limit price is not met; the visible sign is that a stop-loss has only one price (the stop), while a stop-limit has both a stop and a limit price.
- limit order
- A limit order is a single order to buy or sell at a specified price or better, with no stop price, whereas a stop-limit order requires a stop price to trigger the limit order; the visible sign is that a limit order is active immediately, while a stop-limit order is dormant until the stop price is reached.
- stop order
- A stop order (also called a stop-loss order) becomes a market order when the stop price is reached, while a stop-limit order becomes a limit order; the visible sign is that a stop order has only a stop price, whereas a stop-limit order has both a stop price and a limit price.