Though it's impossible to eliminate all risk when it comes to investing and trading, it's natural to look for something to help mitigate at least some of the danger. But even those strategies that seem like they mitigate risk bring their own concerns.

When using a broker or online brokerage, you're given a number of options as to what sort of order to put in when you plan on purchasing or selling shares. Some of these are simple; a market order, for example, is simply buying or selling shares at market value during market hours. Some are a bit more complex.

Take the stop-limit order as an example. It's a combo of two other types of market orders. What is it, what separates it from other trading orders and why do traders use it?

What is a Stop-Limit Order?

A stop-limit order, true to the name, is a combination of stop orders (where shares are bought or sold only after they reach a certain price) and limit orders (where traders have a maximum price for which they'll buy shares or a minimum price for which they'll sell them).

This means there are two prices involved in a stop-limit order. Let's look at a buy stop-limit order. A company's shares are valued at $25 and you expect them to go up today. You put in a stop price at $30. In a stop order, that would mean that once the shares hit $30 your order is triggered and turned into a market order. But with a stop-limit order, you can also put a limit price on it. If you have a limit price of $32, that is the most you're willing to pay for a share. If the shares reach $30 and an order can be processed before they increase above $32, your order is filled. If they don't, your order is not filled.

A sell stop-limit order works in similar ways. Let's say you already own that $30 stock, but expect it to decline. If you put a stop price of $28, once it falls to that level your order is live. If you put in a limit price of $26, you are indicating that this is the absolute lowest you're willing to sell the shares for. If a sale cannot be made by the time the shares dip below $26, the order has not been filled. You'll have to hope the shares return to $26 or higher to try your hand at selling them again.

Stop-Limit Order vs. Stop-Loss Order: What's the Difference?

How does a stop-loss order differ from a stop-limit order? A stop-loss order is another way of describing a stop order in which you are selling shares. If you're selling shares, you put in a stop price at which to start an order, such as the aforementioned $30 shares once they dip down to $28. Unlike the stop-limit order, there is no limit price. A market order is simply initiated.

If you're selling shares of a widely-traded company, it may not make too much of a difference whether you use stop-limit or stop-loss because an order is more likely to go through by the time the limit price is reached. With a stock that's not traded as much or more volatile, using a stop-loss could cause you to sell your shares for lower than you had hoped to.

When to Use a Stop-Limit Order

The reason you'd use a stop-limit order as opposed to a stop order or stop-loss order is to try and maintain as much control over a transaction as you possibly can. You're not just controlling when to put in an order to buy stocks, but also the maximum amount of money you're willing to put in. When selling, you can help limit how much you sell shares for to try and keep your losses from getting out of control.

This control is particularly convenient, as I mentioned earlier, when dealing with an extremely volatile stock. A buy stop order is triggered when the stock hits a price, but if its moving faster than expected, without a limit price you may end up paying quite a bit more than you anticipated when you first placed the order. And not having a limit price on a volatile stock you're selling could mean selling far lower than you were trying to in the first place.

Traders can also determine how long to have their stop-limit order open. They can only be triggered during standard market hours. You can decide when placing your order if you want it only for the current session or if it can extend to later market sessions. If you choose the latter, the order can essentially exist until it is completed, or you cancel it. If you choose to have it for that day only, if the order is not executed, it expires.

Stop-Limit Order Risks

Ultimately, that's the biggest risk on a stop-limit order: it's possible that it won't execute. That's especially risky when selling a stock. What if the order expires before the order is executed, or if the stock dips below your limit price? You're still stuck with a stock in a downturn. You may wait it out and hope it goes back up to your limit price, but after the order expires or is cancelled you may have to use a general market order or stop order to sell it for far, far less than you had wanted to.

Another thing you have to be wary of in stop-limit orders is the possibility of an order that is only partially filled. If you are looking to sell 300 shares, and the price drops below your limit price after only 200 shares were sold, the other 100 are unfilled. This is a risk that is common with stop-limit orders, and one that you should know is a distinct possibility before deciding to place your order. You may wish to do a stop-loss order if you are concerned about your order not being completely filled.

These risks may cause traders to be a bit hesitant about stop-limit orders. That makes sense; stop-limit orders are best used if you have a very specific maximum for buying or minimum for selling in mind. They're not orders to do particularly often.

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