A Stop Order is used to buy/sell at a price above or below the current price. A stop order has two steps to be executed, which are:
• Trigger - the security’s price trades at or through the stop price, triggering/activating the order ; and then
• Execution - the stop order becomes a market order and is executed at the next available price, completing the trade.
Stop Buy Orders
A Stop Buy Order can be used to establish a new long position. Entered above the current market price, (referred to as a ‘stop buy entry order’) once the price is touched the order becomes a market order and is executed at the next best price.
Example: A customer may think that if shares of Apple trade above the 52-week high of $332, they are likely to continue moving higher, but while the price is just below that level, the customer does not wish to buy. The customer could leave a stop buy order at $332.75, which if triggered means the 52-week high has been broken, and the customer would have entered a long position in anticipation of higher prices.
Stop Sell Orders
A stop sell order can be placed below the current price to limit losses on an open long position, or to protect gains on a profitable long position, frequently referred to as a ‘stop loss sell order’ in other markets.
Example: Stop Sell Order (to stem losses) A customer is long 100 shares of Apple at $332, and the stock is now at $329 and the customer is concerned it will fall further, so he places a stop sell order at $327 to prevent additional losses. If the price trades at or below $327, the stop sell order will be triggered and the long position will be closed.
Example: Stop Sell Order (to protect gains) A customer is long 100 shares of Apple at $332, and the stock is now at $341. The customer would like to hang on for more gains but is concerned the stock will reverse and begin to fall, eroding some of the unrealized profit. To deal with this, the customer could place the following order: sell 100 units Apple @ $340 stop price. If the stock does start to head south, once it trades at or through the stop price of $340, the order becomes a market order to sell 100 units Apple and the long position is closed.
Execution is usually certain, but price is not. In most cases, your order will be executed at a price that is close to the market price at the time the sell stop order is triggered.
However, as an example, if a stock’s trading is halted and the stock price gaps down upon reopen (lower than the price at the time trading was halted), your execution price could be significantly lower than your sell stop price.