Quick Answer
A stop-limit order rests until the price trades at or through its trigger, then becomes a limit order rather than a market order. Placement is the same as a plain stop (buy above, sell below), but the outcome flips: it guarantees a price (or better) at the risk of no fill at all.
A stop-limit is a plain stop with one change: when it triggers, it turns into a limit order, not a market order. That single change flips the entire trade-off, so hold the plain stop from the last section next to this one.
What a Stop-Limit Becomes
A stop-limit waits exactly like a stop, but wakes up as a limit order.
- Stop-limit order: like a stop, it rests until the market trades at or through the trigger price. When triggered, it becomes a LIMIT order (not a market order), and then sits on the book as a limit at the specified price.
- Placement is the same as a plain stop: a buy stop-limit goes ABOVE the market, and a sell stop-limit goes BELOW the market. The only change from a plain stop is what it turns into after the trigger.
Guarantees a Price, Risks No Fill
Because it becomes a limit order, a stop-limit protects the fill price but cannot promise a fill.
- Price (or better) is guaranteed; execution is not: the limit caps how far the fill price can move, so the trader is protected from a terrible fill. The cost is that the order may not fill at all.
- Gap risk leaves the position exposed: if the market gaps straight past the limit in a fast, one-sided move, there is no trade at or better than the limit price, so nothing fills. The position the stop-limit was meant to protect stays open and exposed while the loss keeps running.
Here is the trade-off that the exam asks about again and again.
| Feature | Plain stop | Stop-limit |
|---|---|---|
| Becomes when triggered | Market order | Limit order |
| Guarantees | A fill | A price (or better) |
| Risk it accepts | Slippage (fills past the stop in a fast market) | No fill at all (price gaps past the limit) |
| Placement | Buy above / sell below | Buy above / sell below (identical) |
Think of it this way: a plain stop says "get me out, whatever it costs." A stop-limit says "get me out, but not for a penny worse than this price." If the market drops in an orderly way, the stop-limit fills near your number and you are happy you set a floor on the price. If the market craters straight through your limit overnight, the stop-limit stands there refusing every worse price, and you are left holding the losing position it was supposed to close. You traded away the certainty of getting out for control over the price.
Exam Tip: Gotchas
- A stop-limit trades a guaranteed price for the risk of no fill, the exact opposite trade-off from a plain stop. A plain stop guarantees a fill but not a price; a stop-limit guarantees a price but not a fill. If a question stresses "protection from a bad price but might not get filled," that is a stop-limit, not a plain stop.
- In a market that gaps past the limit, a stop-limit can leave a losing position wide open because it never executes. Do not assume a stop-limit always protects the position; its protection disappears exactly when the market moves fastest.
- Placement is identical to a plain stop. A buy stop-limit still sits above the market and a sell stop-limit still sits below it. Only what the order becomes after the trigger changes, so do not let the "limit" in the name flip the placement in your head.