Hard Stop

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Definition of 'Hard Stop'

A hard stop is a type of stop order that is triggered when the price of a security reaches a specific level. This type of order is often used to protect investors from losses, as it ensures that they will not lose more money than they are willing to risk.

There are two types of hard stops: market orders and limit orders. A market order is executed immediately at the best available price, while a limit order is executed only if the price of the security reaches or exceeds a specified level.

Hard stops are often used by investors who are trading on margin, as they can help to prevent margin calls. A margin call occurs when an investor's equity in a position falls below a certain level, and the broker requires the investor to deposit additional funds or sell some of their positions.

Hard stops can also be used to protect investors from large losses during volatile market conditions. For example, if an investor is concerned about a stock price falling sharply, they may place a hard stop below the current price. This will ensure that they will not lose more money than they are willing to risk if the stock price does fall.

It is important to note that hard stops are not always effective. In some cases, the price of a security may move quickly past the stop level, and the order may not be executed. Additionally, hard stops can be triggered by sudden market movements that are not related to the underlying fundamentals of the security.

As a result, it is important to use hard stops with caution. Investors should only use hard stops if they are confident in their ability to assess the risk of their investments. Additionally, investors should consider using limit orders instead of market orders, as limit orders are less likely to be executed at a price that is significantly different from the stop level.

Overall, hard stops can be a useful tool for risk management. However, it is important to understand the risks associated with using hard stops before using them.

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