Stop Orders
Stop orders are orders that go into effect when a particular price is passed or triggered. A stop order becomes a market order once it has been triggered. In other words, once a stop order has passed the specified price, the security will be bought or sold at the best available price.
Investors and traders place sell stop orders below current market prices to protect against a large drop in a stock’s price. For example imagine that a trader buys a stock at 25 hoping for an increase. The trader has reason to believe, however, that the stock may drop. The trader could put in a stop order at 22 (sell at 22 stop). If the stock begins to decline and moves below the 22 trigger, the stock will immediately be sold at the best available price, preventing further losses for the trader.
Stop orders are also used to protect gains in a long position. An investor may place a stop order once a stock achieves a desired gain – the stop order protects the gain if the stock starts to decline.
Conversely, investors and traders place buy stop orders above current market prices