Buy Stop Vs Sell Stop
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Buy Stop Vs Sell Stop
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 in an attempt 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 in an attempt to limit a loss or to protect a profit on a stock that they own.
A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better). The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.
1. You buy XYZ stock at $20 per share. 2. XYZ rises to $22. 3. You place a sell trailing stop order with a trailing stop price of $1 below the market price. 4. As long as the price moves in your favor (i.e., increases, because here you are looking to sell it), your trailing stop price will stay $1 below the market price. 5. The price of XYZ peaks at $24 then starts to drop (not in your favor). Your trailing stop price will remain at $23. 6. Shares are sold when XYZ reaches $23, though the execution price may deviate from $23.
A market order is an order to buy or sell a stock at the market's current best available price. A market order typically ensures an execution, but it doesn't guarantee a specified price. Market orders are optimal when the primary goal is to execute the trade immediately. A market order is generally appropriate when you think a stock is priced right, when you are sure you want a fill on your order, or when you want an immediate execution.
A few caveats: A stock's quote typically includes the highest bid potential buyers are willing to pay to acquire the stock, lowest offer potential sellers are willing to accept to sell the stock, and the last price at which the stock traded. However, the last trade price may not necessarily be current, particularly in the case of less-liquid stocks, whose last trade may have occurred minutes or hours ago. This might also be the case in fast-moving markets, when stock prices can change significantly in a short period of time. Therefore, when placing a market order, the current bid and offer prices are generally of greater importance than the last trade price.
Note, even if the stock reached the specified limit price, your order may not be filled, because there may be orders ahead of yours. In that case, there may not be enough (or additional) sellers willing to sell at that limit price, so your order wouldn't be filled. (Limit orders are generally executed on a first come, first served basis.) That said, it's also possible your order could fill at an even better price. For example, a buy order could execute below your limit price, and a sell order could execute for more than your limit price.
A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price (the "stop price"). If the stock reaches the stop price, the order becomes a market order and is filled at the next available market price. If the stock fails to reach the stop price, the order isn't executed.
When you want to buy a stock should it break above a certain level, because you think that could signal the start of a continued riseA sell stop order is sometimes referred to as a "stop-loss" order because it can be used to help protect an unrealized gain or seek to minimize a loss. A sell stop order is entered at a stop price below the current market price. If the stock drops to the stop price (or trades below it), the stop order to sell is triggered and becomes a market order to be executed at the market's current price. This sell stop order is not guaranteed to execute near your stop price.
While the two graphs may look similar, note that the position of the red and green arrows is reversed: the stop order to sell would trigger when the stock price hit $133 (or below), and would be executed as a market order at the current price. So, if the stock were to fall further after hitting the stop price, it's possible that the order could be executed at a price that's lower than the stop price. Conversely, for the stop order to buy, if the stock price of $142 is reached, the buy stop order could be executed at a higher price.
Remember that the key difference between a limit order and a stop order is that the limit order will only be filled at the specified limit price or better; whereas, once a stop order triggers at the specified price, it will be filled at the prevailing price in the market--which means that it could be executed at a price significantly different than the stop price.
The next chart shows a stock that "gapped down" from $29 to $25.20 between its previous close and its next opening. A stop order to sell at a stop price of $29--which would trigger at the market's open because the stock's price fell below the stop price and, as a market order, execute at $25.20--could be significantly lower than intended, and worse for the seller.
In a similar way that a "gap down" can work against you with a stop order to sell, a "gap up" can work in your favor in the case of a limit order to sell, as illustrated in the chart below. In this example, a limit order to sell is placed at a limit price of $50. The stock's prior closing price was $47. If the stock opened at $63.00 due to positive news released after the prior market's close, the trade would be executed at the market's open at that price--higher than anticipated, and better for the seller.
These inherent risks have prompted major stock exchanges, including the NYSE, BATS and Nasdaq to cease accepting stop orders. Though your broker may still accept your stop order, before you decide to use one, be sure to understand the inherent risks of this type of order.
If the market is volatile, and your sell stop order is triggered, your sell stop order may add downward price pressure on the stock. If your sell stop order is triggered during a precipitous price decline, the stop order also is more likely to result in an execution well below the stop price.
A stop-loss order is an order to buy a security as its price is rising and hits a specified stop price or to sell a security as its price is declining and reaches the stop price. The former is called a buy-stop, and the latter is called a sell-stop.
Most typically investors set sell-stop orders to protect the profits, or limit the losses, of a long position. When the stop price is reached, the stop-loss order converts to a market order and is usually executed immediately thereafter.
Key Takeaway: The main benefit of a stop-loss order is that it limits losses. There is a fairly high likelihood that the order will be executed, but it could be executed at a much higher or lower price than what is set in the order if the price falls or rises too quickly.
Let's assume that an investor buys 100 shares of XYZ Corp for $70/share, a total cost of $7,000. However, the price of XYZ declines to $60/share, making the position worth only $6,000. At this point, the investor is sitting on a $1,000 unrealized loss. If the investor decides that they are unwilling to accept losses more than $2,000 on their position of XYZ, they can set a stop-loss order to sell the shares at the $50 price level. If the price of XYZ does drop to $50 or lower, the 100 shares will be automatically sold at the best available transaction price, protecting the investor from any additional losses.
A stop-limit order is similar to a basic stop order, but with one added condition. With a stop-limit, the investor not only specifies a stop price, but also a stop limit price. If the security in question reaches the stop price, this will trigger a limit order (instead of a market order for a regular stop order). The trade will only execute once the trigger price is reached and the limit price can be executed.
The benefit of a stop-limit order is that it guarantees a minimum trade price for sells, or maximum trade price for buys. The drawback is that the order might not be executed even if the stop price has been reached. If a stock experiences a sharp price movement, it could move right through an investor's stop limit price, resulting in even greater losses on the position that wasn't divested.
Consider an investor who is long 100 shares of XYZ, and has entered a stop-sell order with a stop price of $50, and a stop limit price of $48.50. If shares of XYZ decline to the stop price of $50, the 100 shares of XYZ will be sold as long as a minimum price of $48.50 can be obtained. If the stock price has dropped sharply, and a sell order cannot be executed at $48.50 or higher, the 100 shares of XYZ will remain unsold.
Let's say an investor purchased 100 shares of Acme stock at $80, and that the price has increased to $100. The investor decides to set a stop-loss order at $90 in an attempt to protect some of their profits. Acme shares do eventually decline to $90. At that point, the stop-loss order becomes a market order, and the stock is sold at whatever the best available transaction price is at that moment. Let's assume Acme shares have low liquidity, and the best available price is $88.75. The stop-loss order will result in 100 shares of Acme being sold at $88.75.
Alternatively, the investor could have placed a stop-limit order instead of a simple stop-loss order. Let's assume they set a stop price of $90/share, at a stop limit of $89/share on their Acme stock holding. If the price of Acme shares declined to $90, but the best available transaction price at this point is only $88.75, the order will not be filled since that level is below the stop limit price of $89. In this scenario, the investor's position would be exposed to potential additional share prices declines. The investor's stop-limit order will only divest the shares of Acme if a price of $89 or higher can be realized. 59ce067264