Series 65: Stop Orders

Stop Orders

The SEC explains stop orders nicely:

A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price. Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short. A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own.

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 an investor buys a stock at $25 hoping for an increase but has reason to believe that the stock’s price may drop.