Candlestick Trading Blog

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What are Stop Orders?

Stop orders are orders to buy stock or sell stock once the price of the stock reaches a specific price. This specific price is known as the "stop price" and when that specific stock price is reached, the order then turns into a market order. Stop orders are used more frequently for stock that trade on an exchange more than over the counter stocks. In some situation, brokers do not allow these orders to be placed for over the counter stocks.

Market orders, as mentioned above, are orders to buy or sell a stock at the current market price. There are advantages and disadvantages to markets orders. The advantage of a market order is that there is almost always a guarantee that the order will be executed. They also tend to cost less than limit orders. Your stock broker will automatically enter your requested stop orders as market orders, unless you otherwise specify. The disadvantage to market orders is due to the fast moving markets. What happens is that the price that you pay when you execute your order is not necessarily the price that you obtain from a real-time quote service. It fluctuates due to the fast moving markets. It is recommended that you speak to an investment advisor or broker to have a full understanding of these orders work.

There are two types of stop orders. The sell stop order is always placed below the current market price and its assists investors with avoiding further losses when playing the stock market. It also helps to protect a profit that exists if the price of the stock continues to drop.  A buy stop order is placed above the current market price and it is used when buying stock to limit a loss or protect a profit on short sales. What is great about these orders is that you don't have to constantly monitor how a stock is doing on a daily basis if you don't want to. It is however smart to keep an eye on it to prevent from losing out due to a short-term fluctuation in the stock's price.

Limit orders are also used when trading stocks and are placed in order to avoid buying or selling stock at a price higher or lower than you wanted. It is basically an order to buy or sell a security at a specific price. You can't control the exact price at which your order will be filled when using a limit order, but a buy limit order can only be executed at the limit price or lower. On the contrary, the sell limit order can only be executed at the limit price or higher.

It is important to learn about the stop orders and other orders necessary when trading in the stock market. Continue to educate yourself and learn about how these orders can assist you when investing in stocks.