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Stop order
A stop order is an instruction to buy or sell a stock when it is being negotiated at a specific price and even beyond that price. One can use a stop order could seem similar to a limit order there are some differences. A stop order differs from a limit order in that after the stock reaches the expected price in the stop order this becomes in a market order.
Let?s imagine that you buy some stocks at $20 each, and it is now being negotiated at $30 each. Selling those stocks in this moment would mean achieving a $10 profit per stock. To protect this profit from a quick price turndown you can allocate a stop order to sell the stock at $28. If the price drops to $28 the stop order turns now into a market order and is carried out at the prevailing market price. if each stock is sold at $27.75 you are protected with a $7.75 profit per stock.
On the other hand, if the stock increases its $30 current price after allocating a stop order, the stop order will remain still (if it has no time limit and is a GTC order) until it drops to $28 per stock as stipulated . Equally, you can protect your profits with a short sell using a stop order to buy. Besides protecting your earnings, stop orders can be used to reduce or prevent losses.
Let?s suppose you buy a stock at $10 anticipating it will increase its price. Immediately after buying it news from the company suggest these prices could drop abruptly you should allocate a stop order so that the stock be sold at $9 action that will ensure a limited loss in case it drops to less than $9. Limiting your losses is a short sale which is another way of using a stop order. This is another hazard that can happen when deciding the stop order price. If you allocate a stop order at a price near the current price, a fluctuation or temporary drop in stock prices it could trigger a market order. Then, although prices go back to where you anticipated you would no longer have a position over that stock.
On the other hand if you place the stop order far from the current price you risk a higher loss. Of course the use of stop orders does not increase your profits if you do not correctly anticipate in what direction will stock prices will go.