Stop-Loss Order

  

Categories: Trading

See: Stop Order. Same thing.

In essence, you're stopping a loss by "selling now, Mortimer, now..."

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Finance: What are Buy Stop and Sell Stop...10 Views

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Finance a la shmoop... what are buy stop and sell stop orders? buy stop buy stop

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sounds like Amazon daily deals right well a buy stop order is sort of in that

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realm it automatically executes a buy order if the stock hits a certain price [Buy stop definition appears]

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usually above where the stock is today like apples trading at 180 bucks a share

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you think iPhones are dead, done, over... the new Tesla phone's gonna eat their lunch

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so you short Apple meaning that you virtually sell the shares of Apple

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betting that their stock will go down from the hundred eighty bucks a share it

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sits at today but you might be wrong so to save yourself from having to go to

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the poor house if Tesla phones explode after a certain ringtone or end up [Man holding Tesla phone and phone explodes]

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melting for whatever reason you have a buy stop order along with your short of

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Apple at 180 bucks such that the buy stop executes at $200 a share in this

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way the most you can lose on the short forgetting the borrow or the cost of

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interest on the loan from the brokerage you'll take out too short those

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Apple shares well the most you can lose then is 20 bucks a share a sell stop

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works the same way times negative one meaning you just inherited a million

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shares of caterpillar Tractor Company from old Uncle Albert who kicked the [Uncle Albert gravestone appears]

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bucket and we're so sorry as he was walking home you know from where he

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parked his tractor and then fell and hit his head on a rock and died yeah that's

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Uncle Albert alright well CAT is trading at 50 bucks a share and you think you

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want to slowly trim it in small sales over the next 20 years to fund your life [CAT stock trimmed by scissors]

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as a sculptor that's what the French literature majors do - as long as CAT is

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over say 40 bucks a share well you think you can live a long time on uncle Al's

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dough but if it fell cataclysmically below 40 well you'd have issues paying

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your rent as a sculpture they're like you wouldn't even be able to afford clay [Person sculpting clay ornaments]

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any longer and would have to start sculpting in playdough and that's just

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no fun... so you initiate a sell stop order at 40

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bucks so that if the stock ever did dip to 40 well it would sell the shares

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automatically and you're done all his now your remaining CAT shares would be

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turned into cash so what happens if the stock closes one night at 41 dollars a

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share you know down from the 50 where it was when you inherited it but then the

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company announces a horrible quarter with a Chinese competitor coming into [Chinese competitor tractor company appears in newspaper page]

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the market for half the price of their tractors well that Chinese product is

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all electric and a hundred percent robotically driven in the CAT union

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contracts won't let them downsize fast enough to compete and CAT opens the next

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morning at 35 bucks a share well you put the sell stop order in at 40 do you get

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the 40 bucks a share or a different price?

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well no tough luck limit orders like this aren't guaranteed by the brokerage

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they're more of a trigger to then transact up most likely you'd only get

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35 bucks a share on your sell stop order oh well and yeah you're not a winner [Man crying on gameshow]

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about hopefully you'll look get some nice parting gifts there good luck, buy stop

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sell stop, do it...

Up Next

Finance: What are Limit Order, Sell Limit and Stop Limit?
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What is a limit order, and how can we be sure we never have one of those in place when we go to a doughnut shop?

Find other enlightening terms in Shmoop Finance Genius Bar(f)