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A stop order is a type of order to buy or sell a security once its price reaches a specified level, known as the stop price. Once the stop price is triggered, the stop order becomes a market order and is executed at the next available price. Stop orders are commonly used by traders to limit potential losses (stop-loss) or to lock in profits on a winning position (stop-gain).
An investor holds a stock trading at $100 and sets a stop-loss order at $90. If the stock price falls to $90, the stop order is triggered, and the stock is sold to limit further losses.
• An order to buy or sell once the security’s price reaches a specified level.
• Commonly used to limit losses or lock in profits.
• Converts into a market order once the stop price is reached.
A stop-loss order is designed to limit an investor's losses by selling a stock if its price falls to a specified level.
A stop order becomes a market order when triggered, while a limit order is only executed if the security reaches a specific price or better.
Investors use stop orders to lock in profits by setting a stop price above their purchase price, ensuring they can sell if the price starts to fall.
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