Stop Order

Overview of Stop Orders

A stop market is an order which becomes a market order once the activation (or stop) price you specified has been reached or surpassed. Buy-stop market orders require you to enter an activation price above the current ask price. Sellers must enter the activation price below the current bid price.

A stop limit allows you enter two prices: an activation (or stop) price as well as a limit price. The activation and limit prices can be the same or you can choose a different limit price. A stop limit order becomes a limit order once the activation price has been reached or surpassed. Stop limit orders are accepted on stocks, as well as most options. When choosing stop limit, buyers must enter an activation price above the ask price. Sellers must enter an activation price below the current bid price.

Why and When you might consider using a Stop Order

• Protect gains or limit losses on a long position - A sell stop order is often used to help minimize your risk if a long position moves against you. You can set your activation price below the current bid and if the stock falls to or through your activation price, a market or limit order will be activated.
• Protect gains or limit losses on a short position - A buy stop order is often used to help minimize your risk if a short position moves against you. You can set your activation price above the current ask and if the stock rises to or through your activation price, a market or limit order will be activated.
• To place a buy order above the current price - Buy stop orders are placed above the current price. A buy stop can be used as an exit strategy for a short position, or an entry strategy for a long position.
• To place a sell order below the current price - Sell stop orders are placed below the current price. A sell stop below the current price can be used as an exit strategy for a long position or an entry strategy to initiate a short position.

 

Please Note: With a stop market order, there is no guarantee that the execution price will be equal to or near the activation price. Execution at a price different than the activation price is more likely to occur in conditions such as a fast-moving market, at market open or market close, or when trading has been halted on a security.

A limit order carries the risk of missing the market altogether because it may never reach or surpass the specified limit price. In a fast-moving market, it might be impossible to execute an order at the limit price, so you may not have the protection you sought.

The risk of loss on a short sale is potentially unlimited since there is no limit to the price increase of a security. There is no guarantee the brokerage firm can continue to maintain a short position for an unlimited time period. Your position may be closed out by the firm without regard to your profit or loss.