Continue reading...Traders and investors who seek to limit potential losses can use several types of orders to get them into and out of the market at times when they may not be able to place an order manually. Stop-loss orders and stop-limit orders are two tools that can accomplish this, but it is critical to understand the difference between the two similar sounding orders.
Stop-Loss Orders There are two types of stop-loss orders.
1) Sell-stop orders protect long positions by triggering a market sell order if the price falls below a certain level. The underlying assumption behind this strategy is that if the price falls this far, it may continue to fall much further, so the loss is capped by selling at this price.
For example, let’s say a trader owns 1,000 shares of ABC stock. He purchased the stock at $30 a share and it has risen to $45 on rumors of a potential buyout. He wants to lock in a gain of at least $10 per share, so he places a sell-stop order at $41. If the stock drops back below...
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