These are orders, other than limit orders, that requires a broker to perform a specific act (buy or sell) when certain conditions are met.
- Stop Order: A stop order is only used after a stock has been purchased. These are orders to buy or sell a stock once a certain price has been reached, known as a “stop price”. It was designed to attempt to protect a profit or prevent further loss if the stock starts to go down. When the stop price has been met, your order becomes a market order. With these types of orders customers don’t have to continuously monitor the price. Once the stop price is reached, it becomes active, your order kicks in and becomes a market order. Two negatives: First, once the stop price has been met and it becomes a market order, the final price your order is executed might be very different from your stop price. Second, if for some reason the stock’s price fluctuates for a brief time, it will trigger your stop order, even for example if the stock quickly rebounds on the upside. These orders are more frequently used for stocks that are traded on an exchange vs. Over the Counter (OTC) stocks.
- Buy Stop Order: Buy Stop Orders are placed by investors who think a stock is going to go higher. The stop price (in this case the buy stop order price) must be higher than the current market price. If for example High Five Corporation (HFC) is currently selling at $35, you might put a buy stop price at $40. If the stock reaches the stop price (buy stop price), it becomes a market order. It is designed to protect a profit or limit a loss on a "short sale". (This is an advanced financial term. You can go to the following website for additional information: http://www.investorwords.com/4556/short_sale.html
- Sell Stop Order: A sell stop order is used only after a stock has been purchased. It helps investors avoid greater losses or protect profits if the stock price continues to drop. The stop price must be lower than the current market price. If for example High Five Corporation (HFC) is currently selling at $35 (you might have purchased it at $25), you may be worried the stock price will drop and you want to make sure you receive a profit. You could put a sell stop order for $30. If it reaches that price the broker would then sell at the next available price. Stop sell orders are generally used to protect a profit or limit a stock already purchased at a higher price. Remember, a stop order won’t guarantee a price you will get. It becomes market price and sold as soon as possible, whatever the price.