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A stop order is an order to automatically liquidate a stock position when the stock's price reaches a certain point. A stop order liquidates a position at the best price possible once the target price has been touched. A stop order can be used to either lock in profits or to minimize a loss. Many investors place their stop order as a trailing stop in order to take advantage of a favorable market trend for as long as possible. For example, an investor who is long XYZ Corporation at $10.00 per share might place a trailing stop order 5% (or 50 cents) below the current market price. If the price per share drops 5% the stop order automatically liquidates the position, limiting the investor's losses. If the market starts up, the trailing stop order follows the stock, always remaining 5% below the stock's highest price. When the stock ultimately drops 5% below its highest price the stop order automatically liquidates the position, locking in a profit. A stop order is an important tool for managing risk. |
