What is a Stop Order?
A stop order is an order to buy or sell a stock when the stock price reaches a specified price, which is known as a stop price. When the specified price is reached, the stop order becomes a market order. (a) A Sell Stop Order is used by investors and traders long a stock to protect an existing profit or avoid further losses if the stock price drops. A stop order to sell must be placed below the current market price. (b) A Buy Stop Order is used by investors and traders short a stock to protect a profit or limit a loss if the stock price increases. A stop order to buy must be entered at a price above the current market price. Stop orders may be placed as “Day” orders which are good for the day only, or as “GTC” orders, which are good until cancelled.
A stop order protects the holder of a security up for sale from losses incurred should the price suddenly fall. The security is offered at market price until the “stop price” is hit. A stop order limits the loss or protects the profit of a short seller in the case of an unexpected price rise. The security is purchased at market price until it hits the stop order price. As far as the markets are concerned, a stop order is not a priority order. When market price reaches the stop price, the order becomes a market order. However, this change is not automatic and must be handled manually by a trader. If markets are busy, there may be a delay in completing the order. The delay may increase the risk in relation to fluctuations in the market. Stop orders are not applicable to options.
