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posted on 14 May 2016

Investor Bulletin: Stop And Stop Limit Orders

from the Securities and Exchange Commission

The SEC's 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 and stop limit orders may not be available through all brokerage firms. Investors should contact their firm to determine which stop and stop limit orders are available for buying and selling, as well as 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:

  • The stop price is not the guaranteed execution price for a stop order. The stop price is a trigger that causes the stop order to become a market order. The execution price an investor receives for this market order can deviate significantly from the stop price in a fast-moving market where prices change rapidly. An investor can avoid the risk of a stop order executing at an unexpected price by placing a stop-limit order. A stop-limit order includes a limit price that requires the order to be executed at the limit price or better - but the limit price may prevent the order from being executed.

  • A stop order may be triggered by a short-term, intraday price move that results in an execution price for the stop order that is substantially worse than the stock's closing price for the day. Investors should carefully consider the risk of such short-term price fluctuations in deciding whether to use a stop order and in selecting the stop price for an order.

  • Different brokerage firms have different standards for determining whether a stop price has been reached. Some brokerage firms use only last-sale prices to trigger a stop order, while others use quotation prices. Investors should check with their brokerage firms to determine which standard would be used for stop orders.

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:

  • As with all limit orders, a stop-limit order may not be executed if the stock's price moves away from the specified limit price, which may occur in a fast-moving market.

  • The stop price and the limit price for a stop-limit order do not have to be the same price. For example, a sell stop limit order with a stop price of $3.00 may have a limit price of $2.50. Such an order would become an active limit order if market prices reach $3.00, however the order can only be executed at a price of $2.50 or better.

  • As with a stop order, a stop-limit order may be triggered by a short-term, intraday price move that results in an execution price for the stop order that is substantially inferior to the stock's closing price for the day. Investors should carefully consider the risk of such short-term price fluctuations in deciding whether to use a stop order and in selecting the stop price for an order.

  • As with stop orders, different brokerage firms may have different standards for determining whether the stop price of a stop-limit order has been reached. Some brokerage firms use only last-sale prices to trigger a stop-limit order, while others use quotation prices. Investors should check with their brokerage firms to determine which standard would be used for stop-limit orders.

RELATED INFORMATION

For additional educational information for investors, see the SEC's Office of Investor Education and Advocacy's homepage. For additional information relating to the types of orders investors may use to buy or sell stock, please read our investor bulletin "Trading Basics: Understanding the Different Ways to Buy and Sell Stock."

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