Stop Order
What Is a Stop Order?
A stop order is a type of trading order that automatically triggers the purchase or sale of a security once its price reaches a specified level known as the stop price. Investors commonly use stop orders to limit potential losses or protect profits.
When the stop price is reached, the order typically converts into a market order.
Why It Matters
Stop orders help investors manage risk by automatically executing trades when market prices move beyond certain levels. This allows investors to protect their portfolios without constantly monitoring market activity.
Stop orders are widely used by both short-term traders and long-term investors.
How Stop Orders Work
There are two common types of stop orders:
- Stop-loss orders – used to sell a security if its price falls below a certain level
- Stop-buy orders – used to purchase a security if its price rises above a certain level
Once the stop price is reached, the order is triggered and executed at the next available market price.
Example
An investor buys a stock at $50 per share and places a stop-loss order at $45. If the stock price falls to $45, the order triggers and sells the shares to help limit further losses.
Stop Order vs Limit Order
- A stop order triggers a trade once a price threshold is reached.
- A limit order specifies the exact price at which a trade must occur.
FAQs About Stop Orders
Do stop orders guarantee a specific price?
No. They typically execute at the next available market price.
Why do investors use stop orders?
To manage risk and automate trading decisions.
Can stop orders be used for buying and selling?
Yes. They can trigger both buy and sell orders.
Related Terms
