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Answer:
Dear
Ms. Travis,
To
understand a stop order we need to start with the
term market order. When you tell your broker
to buy or sell a stock at the current price, that's
called a market order. The price you pay or receive
is the same or as close as possible to the quote you're
given when you place that order.
A
stop order, on the other hand, is a specific
advance instruction that you give the broker. It tells
him/her to buy or sell a stock when that stock's price
reaches a certain target price, which is called the
stop price. When that happens, the stop order
turns into a market order and the broker then
gets you the best possible price.
Investors
place stop orders in order to limit their losses or
to protect their profits. Let's say, for example,
that you bought a stock at $20 and it goes up to $50.
You put in a stop order to sell at $40, so you will
be assured of at least making a $20 per share profit.
You shares will automatically be sold at $40.
Or,
you buy a stock at $30 and put in a stock order for
$25. The stock falls to $10. You have saved $15 per
share.
Note:
A stop order to buy must be at a price above the
current market price while a stop order to sell must
have a specified price below the current market price.
$Tip:
It's not smart to set a stop loss order that is too
close to the current price. If you do, you have little
room to recover from what may be just a temporary
decline in value. The rule of thumb (which is, like
all rules of thumb, not 100% accurate) is to set a
stop loss that is 15% to 20% below a stock's current
price.
Stop
orders in the news...
The
term stop order has been in the news a lot recently
because of the official investigation of Martha Stewart.
On December 27, 2001, Ms. Stewart sold nearly 4,000
shares of ImClone, a day before the government announced
it was rejecting the company's new anti-cancer drug.
When that announcement was made public, the stock
then plummeted and Ms. Stewart avoided about $40,000
in losses.
Stewart
said that she placed a stop loss order to sell her
shares if they fell below $60. When no paper documentation
of that order was found, Ms. Stewart maintained that
it was a verbal order. Investigators, on the other
hand, began to wonder if she received advance warning
of the government's decision to reject ImClone's new
drug from the head of the company, who was also a
personal friend. If she did, this would in all likelihood
be known as trading on insider information. The case
is still pending.
Here
at BUYandHOLD, you cannot place a stop order. Trades
can be placed during one of the three trading windows
at 10:00 AM, 12:30 PM, or 3:00 PM. You can also choose
to make a real-time buy or sell order for $15.00 per
trade.
BUYandHOLD
does not recommend any securities. The securities
mentioned above are being used for informational purposes
only and should not be regarded as an offer to sell
or as a solicitation of an offer to buy.
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