Most investors only use buy and sell orders, and there's nothing wrong with that. However, there are a number of other important broker orders that investors can use to sell stocks for better prices or reduce their risk. One lesser known order is a stop-limit-on-quote order, which is an order investors can use to limit losses or buy stocks only after they've reached a certain price.
What is a stop-limit-on-quote order?
A stop-limit-on-quote order is an order that an investor places with their broker, which combines both a stop-loss order and a limit order. What the stop-limit-on-quote order does is enable an investor to execute a trade at a specified price, or better, after the stock price has reached the investor's desired stop price. In a sense it's a two phase order as it is only executed by the broker after the stock has reached the investor's desired stop price, but like a limit order it will only be execute at that price or better. Because of that the key difference between a stop-loss order and a stop-limit-on-quote order is that the trade won't be made if the stock price isn't at an investor's desired price, or better.
An example of how to use a stop-limit-on-quote order
To put the stop-limit-on-quote order into practice let's say an investor has owned a stock for years and it has grown to be a large portion of their retirement portfolio. The investor doesn't want to sell the stock to reduce their allocation because of a firm belief in its long-term potential. However, having recently retired the investor plans to harvest some of the stock gains over time to help fund retirement account disbursements. To better manage this risk an investor could use a stop-limit-on-quote order as a way to sell the stock.
With the current stock price was around $100 per share our recent retiree has determined that if the stock price were to fall to $90 per share it would make sense to raise cash by selling 500 shares in order to safely meet planned disbursements over the next year. What the investor would do in this case is enter a stop-limit-on-quote order for 500 shares at $90 per share. Then, if the stock price did fall to $90 the investor would have 500 shares sold by their broker at a price no less than $90. Meanwhile, if the shares never slipped below the $90 per share mark, this order would remain unfilled and the investor would be free to sell those 500 shares at the currently higher market price.
There is one caveat to keep in mind with a stop-limit-on-order, which makes it different from a stop-loss order. If, for example, the stock plunged to $85 before markets opened, the shares would not be sold until recovering to above $90 per share unless the investor changed the order. Hence, the benefit of a stop-limit-on-quote order is that the stock isn't sold below the investor's limit price, but instead is sold only after a recovery has been made to the desired sell price. Because of this the stop-limit-on-quote order doesn't offer perfect protection as it won't limit losses when there is a dramatic sell-off in the stock. What it does do is set a sell or buy limit that comes into play once the stock hits a certain price.
A stop-limit-on-quote order is basically a combination of a stop-loss order with a limit order. It enables an investor to have some downside protection to sell a stock at their lowest desired price if it falls, without exposing the sale to a market panic. That said, a stop-limit-on-quote order still doesn't protect an investor from a panic sell off as the stock simply would not be sold until the price recovers to the limit price, which might never happen. Still, it's a valuable tool for an investor to use when managing larger positions within their portfolio.
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