Stop orders, often called stop-loss orders, can feel a bit “backward.”
Why would an investor want to buy at higher prices and sell at lower prices? Stop orders are mainly used to limit losses or protect against adverse price moves. The key is that the stop price is a trigger, not a guaranteed execution price.
Let’s assume the following:
Long 100 shares of ABC stock @ $50
Investor places a sell 100 shares of ABC stock @ $45 stop
Sell stop orders trigger when the market price falls to the stop price or below. When the order triggers - also called being elected - it starts the execution process. In this example, the order triggers (elects) when the market price falls to $45 or below.
By placing this order, the investor sets a point where they’ll exit if the position moves against them. Here, they’re trying to limit the loss to about $5 per share (or more, depending on the execution price). You can think of it as placing a “floor” under the position.
Long 100 shares of ABC stock @ $50
Investor places a sell 100 shares of ABC stock @ $45 stop
Trading tape: $45.02… $45.01… $44.99… $44.97… $45.01…
Stop orders don’t execute immediately like limit orders. They work in two steps:
Because the order becomes a market order after it triggers, nothing is guaranteed:
Let’s see if you understand sell stop orders.
An investor goes long 100 shares of stock @ $80. They place a sell 100 shares @ $78 stop order.
Trading tape: $79… $80… $78.50… $78… $79…
At what price will the order trigger? At what price will the order execute?
Trigger.= $78
Execute = $79
Sell stop orders trigger when the market price falls to or below the stop price. This order triggers at $78. After the trigger, the order executes at the next available price, which is $79.
Here’s a video that dives further into sell stop orders:
Buy stop orders are also “stop-loss” orders, but they’re typically used for short stock positions. If you need a refresher, review shorting a security.
Investors with short positions use buy stops to limit losses if the stock price rises. For example:
Sell short 100 shares of ABC stock @ $80
Investor places a buy 100 shares of ABC stock @ $90 stop
Buy stop orders elect (trigger) when the market price rises to the stop price or above. In this example, the order elects when the market price rises to $90 or above.
By placing this order, the investor sets a point where they’ll buy to cover if the position moves against them. Here, they’re trying to limit the loss to about $10 per share (or more, depending on the execution price). You can think of it as placing a “ceiling” above the position.
Sell short 100 shares of ABC stock @ $80
Investor places a buy 100 shares of ABC stock @ $90 stop
Trading tape: $89.97… $89.99… $90.02… $90.01… $89.98…
The order triggers when the market price rises to $90 or above, specifically at $90.02. After the trigger, the order becomes a market order and fills at the next available price. The next available price is $90.01, where the order executes.
Let’s see if you understand buy stop orders.
An investor goes short 100 shares of stock @ $20. They place a buy 100 shares @ $21 stop order.
Trading tape: $20.70… $20.90… $21. 10… $20.50… $20.85…
At what price will the order trigger? At what price will the order execute?
Trigger = $21.10
Execute = $20.50
Buy stop orders trigger when the market price rises to or above the stop price. This order triggers at $21.10. After the trigger, the order executes at the next available price, $20.50.
Here’s a video that dives further into buy stop orders:
Like limit orders, stop orders can be day or GTC orders.
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