Trailing stop limit vs loss
July 13, 2017 The SECs Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about the difference between using stop and stop limit orders to buy and sell stocks. Stop, stop-limit, and trailing stop orders may not be available through all brokerage firms. Investors should contact their firm to determine which orders are available for buying and selling stocks, and their firms specific policies regarding these types of orders. Stop Order 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. Before using a stop order, investors should consider the following:
Stop-Limit Order 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. Before using a stop-limit order, investors should consider the following:
Trailing Stop Order A trailing stop order is a stop or stop limit order in which the stop price is not a specific price. Instead, the stop price is either a defined percentage or dollar amount, above or below the current market price of the security (trailing stop price). As the price of the security moves in a favorable direction the trailing stop price adjusts or trails the market price of the security by the specified amount. However, if the securitys price moves in an unfavorable direction the trailing stop price remains fixed, and the order will be triggered if the securitys price reaches the trailing stop price. Example of a sell trailing stop order: 1. You buy XYZ stock at $20 per share. Before using a trailing stop order, investors should consider the following:
RELATED INFORMATIONFor additional educational information for investors, see the SECs Investor.gov website. For additional information relating to other types of orders investors may use to buy or sell stock, please read our investor bulletin Understanding Order Types. The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law. |