Stop order
A stop order is an order to buy or sell a stock once the stock reaches a specific price, known as the stop price.
When the stock hits your stop price, the stop order becomes a market order and is executed at the best price currently available. Stop orders are used to trigger a purchase if the stock price hits or goes above the stop price. They’re also used to trigger a sell if the stock price hits or drops below the stop price.
Stop orders created incorrectly or at a price that can’t be executed may be rejected.
With a buy stop order, you can set a stop price above the current price of the stock. If the stock rises to your stop price, your buy stop order becomes a buy market order.
MEOW is currently trading at $6 per share. You want to wait to purchase MEOW until it reaches $8 because you think it’ll rise much higher, but only after it reaches $8, so you set your stop price to $8.
With a sell stop order, you can set a stop price below the current price of the stock. If the stock falls to your stop price, your sell stop order becomes a sell market order.
You purchased MEOW for $10 a few months ago. It’s currently trading at $20 per share ($10 unrealized profit). Your goal is to make at least $5 per share if the price were to drop. So you create a sell stop order at $16.50. If MEOW reverses itself and starts to drop below the stop price of $16.50 it becomes a sell market order.
To protect your account against overspending, we’ll over-reserve your buying power for stop buy orders and trailing stop buy orders.
Keep in mind, these percentages might change in response to extreme volatility.
The examples included in this article are for illustrative purposes only. In general, understanding order types can help you manage risk and execution speed. However, you can never eliminate market and investment risks entirely. It’s usually best to choose an order type based on your investment goals and objectives.
All investments involve risks, including the loss of principal. Investors should consider their investment objectives and risks carefully before investing.
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