Definition of 'Stop Order'
There are two types of stop orders:
* A stop-loss order is used to limit losses on a trade. It is placed below the current market price of the security and is triggered when the price of the security reaches or falls below the stop price.
* A stop-limit order is used to protect profits on a trade. It is placed above the current market price of the security and is triggered when the price of the security reaches or rises above the stop price.
When a stop order is triggered, it becomes a market order, which means that it is executed at the best available price. This may not be the same price as the stop price.
Stop orders are a useful tool for risk management, but they should be used with caution. It is important to understand how stop orders work before using them.
Here are some additional things to keep in mind when using stop orders:
* Stop orders are not guaranteed to be executed. If the market moves quickly, the price of the security may reach the stop price and then reverse course before the order can be executed.
* Stop orders can be triggered by market volatility. This can happen even if the underlying security is not moving in the direction of the stop order.
* Stop orders can be used to create a short position. This is done by placing a stop-loss order below the current market price of the security. If the price of the security falls below the stop price, the stop order will be triggered and the security will be sold short.
Stop orders can be a valuable tool for risk management, but they should be used with caution. It is important to understand how stop orders work before using them.
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