A stop limit order specifies the price at which you hope to sell your stock before it falls further. For instance, an order to sell at 64 stop, limit 64 means that when the stock drops to 64 the stop goes into effect and the specialist now is acting on a limit order to sell at 64and at 64 only.
He cannot sell at 631/2 or 62, as he could if either of these prices were the first resting place for a stock that had dropped through an ordinary stop. In other words, the specialist has no option, as would be the case with a market order, to try to obtain the best price possible at the moment.
To avoid some of this rigidity, an investor might place a stop limit order specifying one price for the stop and another for the limit ordersay, 64 stop, 62 limit. This means that should the stock sag to 64, the stop is caught and the limit order goes into effect, but this time with a two-point leeway for the specialist. If the stock drops through the stop, say, to 631/2, the specialist has elbow room in which to sell, so long as the price does not go below 62.
When it is properly calculated, the stop limit order is beautifully precise, but its big disadvantage, as can be seen, is its extreme rigidity. Fluctuations greater than anticipated can leave the buyer or seller high and dry, while his stock plummets or rises out of reach of his limit.
For the investor whose objective is dividends or long-term appreciation, the stop order and its variations are of no consequence. For the investor depending on capital gains over the short term, they have their advantages when properly applied.
One other technique, often confused with the stop order, is "stopped stock." This is a way of guaranteeing purchase or sale of stock at a certain price while hunting for a deal at a better level. If the last sale of Shell Oil was at 371/2 and the lowest offer is now 38, the broker with an order to buy at the market may feel he can acquire a block for his customer at, perhaps, 371/2. At the same time, he doesn't want to miss out by having the stock rise to 39, so he asks the specialist to "stop 100 at 38."
The specialist can do this only if more than 100 shares are offered at that price. In this event, you are guaranteed stock at no more than 38. Orders in the specialist's book take precedence, however. If there is not enough stock to supply orders at 38, the stopped-stock request cannot be honored. On the other hand, should a market order or a limit order to sell at less than 38 come on the scene, you will get your stock at the cheaper price.
It is highly important to learn about stop limit orders and stopped stock, so that you will not be left out in the cold if and when a volatile stock surges above your limit.