Should The Company Pay A Dividend?

Common Stock Dividends
There are 2 ways that investors can earn a profit by buying stock: by buying the stock low and selling it higher, and by receiving dividends. While most companies—especially small, growing companies—do not pay a dividend, most large, profitable companies do by necessity, because there is a limit to how large a company can grow, and so the only way to maintain its stock price is by paying a dividend.


However, there are several advantages to stocks paying a dividend over those that don’t. Dividend-paying stocks provide a more certain income than what price appreciation alone offers. When the stock market declines, holders of dividend-paying stocks still receive an income, and the dividend helps to maintain the stock price even in a down market. And, often, the dividend plus the capital gains of a dividend-paying stock is greater than the capital gains of many stocks that do not pay a dividend. In fact, dividends have accounted for about 40% of the total return of the stock market since 1928!

Should The Company Pay A Dividend?

Whether a dividend will be paid depends on the profitability of the firm. While a firm does not have to earn profits to pay a dividend, it would generally be a bad decision for an unprofitable firm to pay dividends. And without profits, the future payment of a dividend would be in jeopardy.

The board of directors decides if and when a stock dividend will be paid, and how much. The board will generally consider the company’s financial position, both now and in the future, and the opportunity costs of paying a dividend. If the company can use the money to grow faster, then a dividend probably will not be paid. But if a company is both large and profitable, then it could pay some portion of its earnings as a dividend, since it becomes more difficult for a large company to grow ever larger. Hence, without the payment of a dividend, investors will shun the stock, since there is little chance to profit from price appreciation, and the stock’s price will collapse.

Besides size, the largest factor in considering a dividend payment is the company’s common earnings per share (EPS), which is the after-tax income of the company minus the dividends paid to preferred shareholders divided by the number of common shares outstanding.

Earnings Per Share = (Net Profit – Preferred Dividends) / Number of Outstanding Common Stock Shares

If the common earnings per share is high and likely to remain high, and if the company is too large to grow much larger, then the board of directors will probably decide to pay a dividend.

Classification Of Common Stock - Par Value And Stated Value

Classified Stock

Some companies issue different classes of stocks, and thus, are said to have a complex capital structure, or a multiple capital structure, which generally differ by voting privileges. This is most often done so that the founders of a company can retain control of their company by retaining the class of stock with the greatest number of voting rights. Most often, these different classes are referred to as Class A and Class B stock; however, which one has the greater voting rights may differ. For instance, Google has 2 classes of stock. Class B gives the holder 10 votes per share compared to the 1 vote for Class A. The 2 founders of Google and its CEO at the time of Google's IPO held the Class B shares while selling the Class A shares in a Dutch auction. Berkshire Hathaway issued a Class B stock that sold for far less than the Class A stock, which is currently above $100,000 per share, so that smaller investors could purchase some shares.

The different stock classes may also differ in dividends or liquidation priority. The share classes are defined in the corporate charter and bylaws.

Classification of Common Stock

Authorized shares are the shares that have been authorized by the charter when the corporation was formed. Issued shares are authorized stock that has been sold to investors. Issued shares and unissued shares make up all authorized stock. Outstanding stock is stock that is owned by investors. All outstanding stock has been issued, but sometimes a company will buy back its own stock, which then becomes treasury stock, which reduces the number of outstanding shares.

Authorized Shares = Issued Shares (sold to investors) + Unissued Shares
Issued Shares = Outstanding Stock (held by investors) + Treasury Stock (stock bought back by company)

Treasury stock is stock that had been issued by the company, but was bought back by the company. Treasury stock has no voting rights, does not receive dividends, is not used in the computation of earnings per share, and is no longer outstanding stock. Companies buy back their stock for any of the following reasons:

• to increase the market value of each share by limiting supply;

• to provide stock options and bonuses for officers and employees of the company;

• to have additional shares for the acquisition of another company;

• or to prevent a takeover by another company.

Par Value, Stated Value, Legal Capital

Par value is the value assigned to a share of stock when it is authorized, and is much less than its expected market value. Sometimes a stock will not have a par value, but will have a stated value in the corporation's financial records. Par and stated values set the minimum requirement for legal capital, which is the number of shares of outstanding stock multiplied by the par or stated value of each share. A corporation cannot pay dividends or buy back its stock, if doing so reduces the amount of legal capital below the minimum required by state law. Par value is more, however, for preferred stock, because they pay a fixed dividend that is a set percentage of the par value.

Why do Stocks have Par Value or Stated Value, and why is this less than the Market Price?

When a company first becomes incorporated, the state of incorporation must approve the number of shares of stock that the corporation is authorized to sell—authorized stock, or capital stock. Many states require that the stocks also have a par value, or nominal value, to provide a minimum amount of legal capital to pay creditors. The legal capital is equal to the par value multiplied by the number of shares of outstanding stock, which is the number of shares currently held by investors. The corporation is not legally permitted to pay dividends or buy back its own stock, if doing so reduces the amount of legal capital below the required minimum. The par value is printed on each stock certificate. The par value of each stock is also changed accordingly by stock splits. A 2-for-1 split, for instance, would halve the par value.

The par value is often $1 or less, which is much less than the market price or the expected market price of the stock. The par value is set low, because the stock cannot be issued for less than par value. If par value were higher and if the demand for the stock was less than anticipated, the corporation would be unable to sell the number of shares that it planned, since it would not be able to lower its price below par value in order to increase demand for its stock.

The par value of preferred stock is much higher than common stock because preferred stock pays a fixed dividend that is a designated percentage of par value.

No-par stocks have no par value printed on its certificates. Instead of par value, some states allow no-par stocks to have a stated value, set by the board of directors of the corporation, which serves the same purpose as par value in setting the minimum legal capital that the corporation must have after paying any dividends or buying back its stock.

If a corporation's stock has neither par value nor stated value, then the legal capital required is equal to the total amount received when the stock was first issued.

Basic Concepts Of Common And Preferred Stocks - The Rights

Stock Voting Rights

Common stockholders, unlike preferred stockholders, have the right to vote for the corporate board of directors, who, in turn, have complete control of the company. Each stock gives the stockholder one vote for each director position that is up for voting, but that vote may be apportioned in 2 different ways. Statutory voting allows using all votes for each of the vacancies for the board of directors; cumulative voting increases the number of votes that a stockholder can use for a particular candidate. For instance, if there are 4 different vacancies on the board and a stockholder owns 500 shares, then a statutory voting privilege allows the stockholder to cast 500 votes for each of 4 candidates for the 4 vacancies for a total of 2,000 votes, but no more than 500 can be cast for any candidate. Cumulative voting would give the shareholder 2000 votes (500 X 4) that could be apportioned in any way: all 2000 votes for one candidate, or 1,000 for one, 500 to each of two others, and none to the others, for instance.

If a stockholder cannot attend a meeting to vote, then he can cast his vote by proxy through the mail, or having someone else at the meeting to cast his vote.

However, the voting privilege is not as much as a privilege as the word may suggest:

• Shareholders don't select the nominees.

• Directors can win without a majority, so withholding votes is usually ineffective. However, many companies are requiring majorities for directors to be elected.

• When stocks are held in street name, your broker can vote your shares without your permission, but starting in 2010, they will require your permission.

• Stocks held by a mutual fund or pension are technically owned by the fund, so only the fund's managers can vote the shares.

• The Securities and Exchange Commission may adopt a new rule that would require that companies include in their proxy materials the nominees of shareholders of large companies who own at least 1% of the shares.

Right To Information

In addition to the reports that a shareholder receives, which includes an audited financial statements every year, he also has the right to the minutes of the meetings of the board of directors and to examine the list of stockholders, although these rights are not usually exercised.
 

Pre-emptive Rights

A pre-emptive right is the right of existing stockholders to purchase new issues of the company stock before it is offered to the public, so that existing stockholders can maintain proportionate ownership of the company, if desired. Although most states have laws that give shareholders pre-emptive rights, the company may, depending on the law, pay stockholders a fee to waive their pre-emptive rights or the pre-emptive rights may exist only if so specified in the corporate charter. Pre-emptive rights were more prevalent in the past, but are rare today.

When the corporation does give its stockholders pre-emptive rights, it generally issues subscription rights that show how many shares the stockholder can buy and at what price. For instance, if shareholder John Doe owns 10% of the company, and the company issues 100,000 new shares of stock, then the company will allow John Doe to buy at least 10,000 shares of stock before the stock is presented to the public, so that he can maintain his proportionate ownership of the company. He can refuse to buy any new issues, or only some of them, but then his ownership percentage in the company will decline, and along with it, the number of pre-emptive rights received in any future rights offering.

Rights To Dividends

A corporation does not have to distribute profits to shareholders in the form of dividends, and indeed, many growth companies re-invest profits for greater growth rather than distribute them to shareholders, but if the company does declare a dividend, which is equal to a specific amount for each share of stock, then common shareholders are entitled to the dividend amount times the number of shares that they own. However, common shareholders have inferior rights to dividends than preferred shareholders, if the company has preferred shareholders.

No Stock Rights For Beneficial Owners Of Shares Held In Street Name

Most retail investors use brokers to buy and sell stock, and these stocks are usually held in the broker's name or the street name as it is usually called. This is done so that the securities are readily available for trading and it reduces the costs of transferring certificates. It also allows the broker to lend out the securities for a fee to others who want to sell the stock short. Because the stocks are actually in the name of the broker, the broker's customers who actually bought or borrowed the stock are considered to be the beneficial owners of the stock, and, hence, they have no stock rights—no right to vote, to receive information or dividends. In fact, the registrar of the stock does not even have the names of the beneficial owners, only the real owners who are the brokers for the stocks held in street name.

However, most brokers do pass the information and dividends that they receive for the stock to the beneficial owners, and they will generally vote the way the beneficial owners request.

However, there could be a problem with voting if the stocks were lent to be sold short, because a broker does not have the voting rights for stock lent out or sold short; otherwise more votes could be cast than are allowed by the number of outstanding stocks. However, a broker may still be able to vote the stocks according to the instructions of the beneficial owners if the broker has other shares of the same stock that was not lent out and if some of the beneficial owners have not sent instructions to vote a particular way. However, if the broker does not have enough shares to satisfy all requests to vote, then the votes may be apportioned according to the number of requests for voting and the number of shares held by each beneficial owner compared to the number of shares available for voting. For instance, suppose John is the beneficial owner of 300 shares of XYZ stock and Jane is the beneficial owner of 500 shares of XYZ stock, and both use the same brokerage, but their broker lent out 400 shares to be sold short. If John and Jane both issue voting instructions for different board candidates, then the broker can only vote half of the shares still retained, so the broker would vote 150 shares according to John's instructions and 250 shares according to Jane's.

There is no similar problem for dividends, because borrowers of stock are required to pay the dividend to the lenders of the stock.

Basic Concepts Of Common And Preferred Stocks

Stocks, which represent ownership in a corporation are, and have been, one of the best investments one can make. The potential for profit is much greater than with guaranteed investments or interest-paying investments.

The main benefits of corporations over sole proprietorships and partnerships are that:

• its owners—stockholders—are liable only for the amount invested;

• the corporation can raise large amounts of money through the sale of stocks and bonds;

• complete control is vested in a board of directors, which the stockholders choose through voting.

The main disadvantage is that a corporation is carefully regulated by law, and must publish and distribute numerous reports to stockholders and various government agencies.

Corporations are business entities that operate under a charter from a state and raise capital by selling stocks and bonds, a form of capitalization.

Stocks are equity capital, giving the owners of stock a part ownership in the corporation, and bonds are debt capital. Bond holders lend money to the corporation by buying their bonds.

Total capitalization is the sum of equity and debt capitalization.

The net worth or shareholders’ equity is the difference between total assets and total liabilities of the corporation.

Legal Rights Of Common Stockholders

Common stockholders have the following legal rights:

• The right to receive stock certificates as evidence of ownership.

• The right to vote at stockholders’ meetings.

• The right to receive any declared dividends, and to sell the stock.

• The right to information and to receive financial reports about the company.

• Sometimes they may have the right to buy newly issued shares of stock by the company before the shares are sold to the public, so that current owners can maintain their proportionate interest in the company, if they so choose. Whether they have this privilege is determined by law or by the company's charter.

The Dogs Of The Dow Strategy - The Results

The following table presents the total returns for various calendar years and the average of annual total returns for the one, three, five, 10, and 19-year periods ending December 31, 2010.

All total returns are calculated using reinvested dividends, and all data is in %.

Investment		2004	2005	2006	2007	2008	2009	2010		1 Year	3 Year	5 Year	10 Year
Dogs of the Dow		4.8	-5.1	30.3	2.2	-38.8	16.9	20.5		20.5	-0.5	6.2	4.6
Small Dogs of the Dow		13.2	-0.4	42.0	4.2	-49.1	10.2	26.7		26.7	-4.1	6.8	5.7
Dow Jones Industrial Average		5.3	1.7	19.1	8.9	-31.9	22.7	14.1		14.1	1.6	6.5	4.8
S&P 500		10.9	4.9	15.8	5.5	-37.0	26.5	15.1		15.1	1.5	5.2	3.6
Fidelity Magellan		7.5	6.4	7.2	18.8	-49.4	41.1	12.4		12.4	1.4	6.0	3.3
Vanguard Index 500		10.7	4.8	15.6	5.4	-37.0	26.5	14.9		14.9	1.5	5.1	3.5

The Dogs Of The Dow Strategy

The Dogs of the Dow is a fairly simple investment strategy. It was proposed by Michael O'Higgins in the early 1990's and it basically says take the 10 stocks with the highest dividend yields and buy them for next year because those stocks should outperform.

So you should pick the 10 highest yield shares in the Dow Jones Industrial Average and put an equal amount of money into each of them. Adjust the portfolio once a year so that it once again has equal amounts in the top ten shares by yield.

The strategy has become so popular that there are even two special Dow Jones indices (the Dow 5 and the Dow 10) that track the performance of Dogs of the Dow type strategies.

The track record of this type of value investing is fairly good, and it is certainly a strategy worth considering.

It also has the advantage of requiring a portfolio re-balancing only once a year which means that trading costs are low. Using an execution only broker who charges a flat rate per trade, the maximum possible commission paid per year is just twenty times the commission per trade. It is likely to be much lower.

HOW HAVE DOGS OF THE DOW STOCKS PERFORMED LATELY:

- During the tech bubble of the late 90s, the high dividend stocks of the Dogs of the Dow were up 28.6% in 1996, up 22.2% in 1997, up 10.7% in 1998, and up 4.0% in 1999.

- During the difficult bear market years of 2000 - 2002, the Dogs of the Dow were up 6.4% in 2000, down 4.9% in 2001, and down 8.9% in 2002, and that was enough to significantly outperform the Dow, S&P 500, and Nasdaq.

- In 2003, the high dividend stocks of the Dogs of the Dow gained 28.7% and made new, all-time highs despite the massive bear market of 2000-2002!

- In 2004, the high dividend yield Dogs of the Dow remained in record territory with a 4.4% gain and then gave back 5.1% in 2005.

- In 2006, the Dogs of the Dow surged to new record highs with a gain of 30.3%. The Small Dogs of the Dow did even better with a gain of 42%!

- In 2007, the Dogs of the Dow and the Small Dogs of the Dow were flat but declined in 2008 along with the rest of the market as the financial crisis unfolded.

- In 2009, the Dogs of the Dow rebounded with a 16.9% gain.

- In 2010, the Dogs of the Dow significantly outpaced the Dow with a gain of 20.5%. The Small Dogs of the Dow did even better with a gain of 26.7%!

Passive Investing: Buy And Hold

Buy and hold investment strategies are exactly  what the name says. You buy some stocks, and never sell it! Rather than trading regularly securities are purchased and held for a long period of time (usually many years).

The greatest advantage of buy and hold strategies is that of passive investment: low cost. Brokers commissions, spreads and other dealing costs become occasional rather than frequent.

Buy and hold strategies are not necessarily passive or mechanical, although many are. A buy and hold investor may actively select investments, but hold investments once bought, and review a portfolio with a view to buying and selling relatively infrequently.

The thinking behind a purely passive buy and hold strategy is that of other passive strategies, with, perhaps, a greater emphasis on minimising costs — unlike passive strategies such as index tracking that require constant re-balancing.

More active buy and hold strategies usually rely on the assumption that it is possible to select mispriced securities (usually shares), implying that markets are not efficient, but that these mispricings will be corrected in the long term.

Passive investing

Passive investing is the opposite of active investing. It is often taken to be synonymous with index tracking. However there are many other passive strategies, such as buy and hold strategies — especially mechanical ones.

The strongest argument in favour of passive investing is that the market is efficient, and therefore efforts to beat the market are likely to achieve little more than increase costs. It is also inevitable that at least as many active investors will under-perform the market as will out-perform. Trying to beat the market is a zero sum game.

This means that it is possible to argue for passive investing even if the market is not efficient, because most investors will under-perform the market.

Given that the average investor will perform in line with the market, index tracking offers the advantages of lower volatility, and much lower costs. Tracker fund charges are much lower than those of active fund managers.

It is sometimes argued that by allocating assets to the largest companies, exposes investors too much to the largest sectors. Although a different allocation might give a lower volatility, it will do so at the expense of returns, because the market portfolio is on the efficient frontier. A better strategy for controlling risk would be to move along the capital markets line by buying risk free assets.

The reason for this might be clearer if you consider the CAPM. Sectors that have a heavy market weighting will have a higher correlation with the performance of the market. They will therefore have a higher beta, and their future returns will be more heavily discounted. Therefore such sectors will have higher expected returns.

Averaging Down And Dollar Cost Averaging

Averaging down means buying more of a security an investor has already bought at a higher price.

Because of the unit cost averaging effect, averaging down leads to an average price closer to the current (lower) price rather than the original (higher) price.

The effect of this is that it greatly improves the chances that the holding of the security in question will be profitable. However, it does this by diluting the impact of the original holding. It cannot actually create gains where there were none. It obscures the loss made so far by mixing it in with new purchases that will, hopefully, be bought cheap enough to make gains.
 

Unit cost averaging
 

Unit cost averaging is a method of timing purchases to reduce the exposure to fluctuations in the price of the security being purchased. It is also called pound cost averaging, dollar cost averaging etc.

An investor using cost averaging splits a purchase of a security into several tranches which are bought at different times. This has the benefit of smoothing out the effects of short term fluctuations in the share price.

The price that is finally paid will tend to be closer to the bottom end of the range in which purchases were made than to the top end. To see the reason for this consider a simple example:

An investor spends $20,000 buying shares in two tranches of $10,000. The first purchase of 1,000 shares at $10. The price then falls and the next purchase is of 2,000 shares at $5. The average price paid is $20,000 ÷ 3,000 = $6.67. This is less than the first price of $10.

Unless the price is likely to fluctuate wildly, any gains from cost averaging are likely to be outweighed by the additional costs of trading this way.

Asset Allocation Basics

Asset allocation is the process of deciding what proportion of an investment portfolio should be invested in:

• different types of investment (shares, bonds, real estate etc.),
• in what markets (what regions and countries, how much abroad, how much in emerging markets etc.),
• in what sectors,
• the proportions invested in large cap or small cap companies.

Asset allocation can boost performance by identifying markets or sectors that are undervalued as a whole. Correctly identifying these will clearly improve performance. These are also more likely to contain individual securities that are undervalued. 

Asset allocation can improve both diversification and performance — although these aims do, to an extent, conflict. A discplined approach can also help avoid style drift.

The reasons why good asset allocation improves diversification should be fairly obvious. It helps ensure that investments are spread out across a wide range of markets and securities, and the allocations should be chosen to avoid investing too much in markets and securities whose movements are strongly correlated with each other. 

Proponents of asset allocation claim that the main driver of investment returns are at market and sector levels. Proponents of bottom up investing tend to argue that the biggest potential gains come from the movements in the best performing individual securities. Both are true, and the choice of approach ultimately tends to depend on how confident and investor is in their ability to pick stocks. 

How assets are allocated depends on a number of factors:

• an investor's views on which markets and types of securities will outperform, this depends on views on economic growth and interest rates,
• the need to diversify,
• the aims of the portfolio,
• what assets an investor owns outside investment portfolios.

Investors who rely heavily on asset allocation are using a top down approach.

SOUTH Trading System Performance (March 2011): +53.16%

SOUTH – Short Only

Direction: Short Only

Leverage Used: 2:1

Max Drawdown: -5.37%

Starting Capital: $10,000

Ending Capital: $24,340

Net Profit (Month March): $8,448

Net Profit % (Month March): 53.16% 

Net Profit (Since Inception): $14,340

Net Profit % (Since Inception): 143.41% 

Things cannot be better! March was an incredible month for our system posting an overall gain of 53.16%, after making 32.23% in February! Like last month, system started to make profits from the first trading day, having only three negative days and finishing a month with a all time high! Drawdown based on loosing trades in February was less than reported -5.36%.

At the end of March, South trading system made 53.16% before commissions, and a compounded gains of 143.41% (since inception in January 2011). This month’s drawdown was -3.83%, which is less then a historical drawdown of -5.37%. It is important to understand that reported drawdown was based on loosing trades only, which means that if a trade was profitable when closed, but had a loss while it was opened (because of natural contractions of the market), that loss would not be reported by our drawdown calculations! Real drawdown is allways higher by 3-5%, so readers should know this.

Largest daily loss during the month was -2.90%, and a largerst daily gain of 10.27%.

At the end of this month, since inception South trading system made $14,340 and finished a month with a balance of $24,340.

To see South's last month report click here, and other trading systems offered click here.

EAST Trading System Performance (March 2011): +32.96%

EAST – Short Only

Direction: Short Only

Leverage Used: 2:1

Max Drawdawn: -3.04%

Starting Capital: $10,000

Ending Capital: $18,861

Net Profit (Month March): $4,635

Net Profit % (Month March): 32.96% 

Net Profit (Since Inception): $8,861

Net Profit % (Since Inception): 88.61%

This month system made excelent results – profit of almost 33%! Drawdown asociated with this result remained at -3.04%. As we said last month, drawdown calculations are based on losing positions, so they are not 100% accurate. Real drawdown can be higher ie. -5.00% instead reported -3.04%.

In March 2011, system made a profit of 32.96% with a -3.04% drawdown. 

The chart below shows daily profit and loss made during this month. As it can be seen from the chart, largest daily loss was -2.10% and largest daily gain was 7.20%.

To see East's last month report click here, and other trading systems offered click here. If You would like to subscribe to this system and start reciving daily Trade Alerts,  click on the link below and fill out the form:

NORTH Trading System Performance (March 2011): +3.21%

NORTH – Long Only

Direction: Long Only

Leverage Used: 2:1

Max Drawdown: -6.79%

Starting Capital: $10,000

Ending Capital: $12,890

Net Profit (Month March): $400

Net Profit % (Month March): 3.21% 

Net Profit (Since Inception): $2,891

Net Profit % (Since Inception): 28.91% 

March was solid month posting an overall gain of 3.21%, profits close to last month's profits, when we made 3.79% in profits during February. In the first half of the month system made more than 9%, but during second half of the month things went south.

At the end of March, system made 3.21% before commissions and made a compounded gains of 28.91% since inception (January 2011). Drawdown was less then historical (-2.37%), so we reported drawdown since inception of North trading system of -6.79%,.

Largest daily loss was -2.37% and largest daily gain was 5.52%.

At the end of this month, since inception, North trading system made $2,890 and finished a month with a balance of $12,890.

To see North's last month report click here, and other trading systems offered click here. If You would like to subscribe to this system and start reciving daily Trade Alerts,  click on the link below and fill out the form:

Different Types Of Limit Orders

LIMIT ORDERS (LMT):

Limit orders is an order that can be used to enter or exit a trade. It specifies a price that the trader is willing to pay or accept (or better). A buy limit order is placed below the current market price and states the highest price the trader is willing to pay for a purchase. A sell limit order is placed over the current market price and is the lowest price the seller is willing to accept.

If you already have a position in the market - you were long the market, you could use a limit order to tell the broker at what price you wanted to sell once your price objective had been reached. You could also use the order to tell the broker at what price you want to enter the market. If ABC Company was trading at 44.00 and you wanted to buy that company at 43.00 you could use a buy limit order to take you into the market.

Limit orders are orders to buy or sell a stocks at a specific or better price. Limit orders may or may not get filled depending upon how the market is moving, but if they do get filled it will always be at the chosen price, or at a better price if there is one available. For example, if a trader placed a limit order with a price of 30.29, the order would only get filled at 30.29 or better, if it got filled at all. Limit orders are used when you want to make sure that you get a suitable price, and are willing to risk not being filled at all.


STOP LIMIT ORDERS (STPLMT):

Stop limit orders are a combination of stop orders and limit orders. Like stop orders, they are only processed if the market reaches a specific price, but they are then processed as limit orders, so they will only get filled at the chosen price, or a better price if there is one available. For example, if the current price is 30.25, a trader might place a buy stop limit order with a price of 30.30. If the market trades at 30.30 or above, the stop limit order will be processed as a limit order. If the market continues to trade at 30.30, the limit order will get filled at 30.30 or at a better price if there is one available. Stop limit orders may or may not get filled depending upon whether or not the market reaches the chosen price, and then depending upon how the market moves. Stop limit orders will trigger if the market trades at or past the stop price, so for a buy order, the stop price must be above the current price, and for a sell order, the stop price must be below the current price

This type of order specifies both a stop price where the trade is activated and a limit price to close the position. Once the stop is elected, the order becomes a limit order. This type of order is useful when the trader wants to buy or sell a breakout, but wants to control the price paid or received.

A stop-limit order differs from a stop order, which becomes a market order when the stop price has been reached or exceeded. A stop-limit order to buy must have a stop-limit price above the market price; conversely, a stop-limit order to sell must have a stop-limit price below the security's market price.