Stock traders have choices when purchasing or selling a stock. Market orders are made to buy or sell a stock at the current price. Stop and limit orders are filled when a stock reaches a price selected by the buyer or seller.
Stop orders can be used for both the purchase and sale of a stock. For selling a stock, a stop order will fill if the price drops to the stop price. Stop orders can be set for a trading day or until remain good until cancelled.
An example will be used throughout this article to illustrate the principle. For instance, if a stock price is currently $40, a stop order can be placed for any amount less than $40.
If a stop order is placed at the price of $35, the stock will be sold if the price drops to $35 or lower. If the price remains above $35, the stock is not sold.
Although in some cases stop loss orders can prevent devastating losses, most investors should avoid using them. Frequent buying and selling increases commission cost, and stop losses are not completely effective in eliminating disastrous damages in sharply falling investments