Stop Orders
Stop orders are orders that become market orders when the market reaches a particular price. In other words, once the market has passed the specified price, the stop order is triggered, and the security will be bought or sold at the next available price (whether higher, the same, or lower than the trigger price). Stop orders are also called stop-loss orders or stop market orders.
Investors and traders may place sell stop orders below current market prices to protect against a large drop in a stock’s price. If a stock begins to decline and moves below the trigger, the stock will immediately be sold at the best available price, preventing further losses for the trader. An investor may also place a sell stop order to protect a sizable gain, in case the stock price starts to fall. Conversely, short sellers place buy stop orders above current market prices to protect against a rise in the stock price. In other words, it is a way to lock in short sale gains.
Example: Barbara is long 100 shares of Microsoft. She has already made a nice profit on this stock and is worried that the stock may now start to decline. She would like to protect her gains. The bid-ask spread for MSFT is currently 42.13 – 42.15. Barbara places a sell stop order for 100 shares