A stop order is like putting a lure out on a pond but having a robot there to cut the line or reel in the lure if the conditions are not met, such as a fish too small to bother with, to stick with the metaphor, so that the fisher-person (investor) can take a nap or attend to the many other lines he may have in the water.
A stop order names a price which serves as a trigger point, and once the security price has crossed this trigger point, a market order is entered to buy or sell at the next available price. It might be called a buy-stop or sell-stop depending on which action it pertains to.
The problem is that the next available price may not be ideal in some situations, and for this reason sometimes the investor may take it further and name a limit at which the security can be bought or sold, after the actual stop order has been triggered, which would be called a Stop-Limit Order.
So it can get a little confusing.
At the level of a Stop Order, though, it's pretty straightforward. For instance, if I put a Stop on my shares of ABC, if the price falls below the Stop price I've stipulated, the shares are up for grabs and I'll take the next available price for them.
That order can also be called a Stop-Loss Order because it's an attempt to stop the potential losses from getting any bigger.
It is a way to hedge and almost "fence-in" an investor's exposure to market fluctuations which might otherwise catch the investor by surprise and require the investor to manually enter a trade ticket whenever the news of the price change reached him.
It also might be an automated way to lock in potential gains. I could put a stop order at a higher price than I paid for my shares, if I don't believe the security is likely to attain prices much higher than that, to go ahead and agree to sell at what I believe would be a high-water mark in my estimation of things.
These are examples of Conditional Orders and can be entered as multiple orders in the same overarching order.
ETFs are widely available through brokers and online trading services. ETFs can be purchased in the same way that you...
Mutual funds are actively managed. ETFs are mostly passively managed, usually track a specific market index, and can be bought and sold like stocks.
You may hear differences about the amount of life insurance you need. One is take your annual income and multiply it by 10
These levels do not have to be horizontal; the resistance and support levels can have either a positive or negative...
Breakouts are events where a stock or index suddenly changes the magnitude and direction of its trading range
Price to Tangible Book Value serves as a conservative estimation of the value inherent in a share, without intangibles
In a currency swap, institutions will loan each other an equal principal amount at the current exchange rate (1-30 yrs)
An Account Hold is similar to the term Account Freeze, as both imply that transactions have been suspended for an account
Some people use the term “home office” to loosely refer to the fact that they work primarily from their home, while...
See the profitability of the Head-and-Shoulders Bottom pattern with Tickeron's Backtested Odds of Success. Learn more with our Pattern Search Engine.