Stop order

DEFINITION of stop order

Stop order is the type of order that require from broker to execute a trade when it reaches a certain level, less apt than the current market price. They are also known as stop-loss orders.

WHAT IT IS IN ESSENCE

These orders are different from market orders because the price is specified at which a trade should be executed.

Market order means that the broker has to execute a trade at the best price available when you make the order. But stop orders are opposite to limit orders, which require your broker to buy or sell an asset at a particular price that is more favorable than the current market price.

Put simply, the stop-loss sell order is designed to limit an investor’s loss on a particular stock. Stop-loss orders typically fall into four classes, although some dealers may offer products that vary in their structure and complexity. Some classes are more commonly used than others and dealers do not typically offer all classes of stop-loss orders.

The stop loss function shields investors from holding a non-profitable position for a long period of time. Contrary, that could result in big losses of capital. On the other hand, there is a distinction between the profits’ enhancement and risk reduction. The orders of stop-loss have an influence on the fall of prices.

HOW TO USE

Traders use them in order to limit risk by automatically closing a position once it reaches a certain level of loss. This is called a stop closing order. The other reason for using stop orders is to take advantage of market movements by opening a position when a market drops to a certain level. These are called stop entry orders.

Traders can use them to lock in a certain amount of profit in a trade. It’s important to understand that stop-loss orders differ from limit orders. In a fast moving market, a stop-loss order may not be filled at exactly the specified stop price level. But will usually be filled fairly close to the specified stop price. Traders should understand that in some extreme instances stop-loss orders may not provide much protection.

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