The Difference Between Stop Market, Stop Limit, and Trailing Stops

[Music] while market and limit orders are most commonly used by investors there are other types of orders that may suit your needs in this video we will review the various types of stop orders stops and turn stops can help add flexibility to trading they can also help limit losses protect profit and they can be used to enter into positions based on momentum before we go over each type let's adjust one question first what does it mean to use a stop in an order a stop or a stop loss is a traditional way of saying that an investor is looking to limit loss on their trade and it's most commonly used on sell orders when they're holding an existing stock or ETF we know from our last lesson on limit orders that if an investor wants to sell their stock they can enter a limit price that's higher than the current market price of that stock they do this to try and take profit when the stock rises to a certain target price for example if abc1 stock is currently $50 per share that an investor may enter a limit order to sell at $55 by doing this they are seeking to exit an increase their proceeds by $5 a share with a stop loss instead of entering a sell price that's higher than current market price the investor could enter a price that's lower instead like $40 not 55 $10 less than the current market price the $40 is called a trigger price and the order may be executed immediately as soon as the stock dropped to or through the amount but this depends on what type of stop order you are using now there are two types of standard stops stop market and stop limit let's go over stop market first a stock market gives investors an opportunity to set in advance the trigger price that activates a market order to buy or sell a stock let's look at a commonly used example a sell order let's say you bought a stock at sixty dollars a share right before going on vacation because you may not be able to keep an eye on your portfolio while you're away you may want to set up a stop-loss sell order this could help you exit your position and limit loss if the stock drops in price this is called selling on stock if you decide that you want to sell your shares when the stock goes down $15 a share then you could set up a stop trigger price of $45 this means that if their stock were to drop to $45 or below then the order would be triggered and the stock would be sold at the prevailing market price although you set a trigger price of $45 it's important to note that you aren't guaranteed $45 for the sale in fact the sale price is unknown why is that this is because the stock could be trading at any price after it triggers this can be amplified the more volatile a stock is for example if the trigger was activated at $45 the stock could drop beyond 45 to $40 this means that when the order is filled you will receive $40 for the sale on the other hand the stock could be trading at a slightly higher price after it triggers because the order becomes a market order after being triggered the stock is sold at the best available market price and it could be at any price needless to say if you're considering a stock market order make sure you're comfortable taking on some risk with the unknown price factor you may also want to consider exercising increased caution if you're thinking about placing a stop market order on stocks that typically see more daily movement in price stop limit orders on the other hand may offer a little more control on that front but they can reduce the likelihood of the order being filled this is because a stop limit lets you select not only a trigger price but a limit price as well this is the bare minimum amount you are willing to accept for the sale of an investment or the maximum amount you are willing to pay for a buy for example on a stop limit sell order the trigger might be $45 and the limit price might be 43 the order is triggered once the stock drops to or below $45 if the new stock price is at or above $43 then the limit order is filled however if the price drops down below $43 like 240 or 35 then the stop limit sell order remains open at this point you need to wait for the stock price to rise back up to or above the limit price of $43 before the order is filled for this stop limit order the execution is guaranteed to be no less than $43 so with a stock market the order is executed at the best available market price as soon as the stock price drops to or below the trigger price but the exact price of the execution is uncertain however while a stop limit may give you a little more control over the price execution the length of time it takes to fill an order is uncertain if the stock drops below the limit price in a sell order or if the stock rises above the limit price in a buy order the order remains open and you may have to wait some time before it is felt there are many reasons why a stock would rise and fall drastically beyond the trigger price for example a company may make a major announcement about their earnings or product offerings if consumer sentiment is widespread and either positive or negative then the stock may spike upwards or drop we talked a little bit about why we would use a stop on a sell order but what about a buy order there are a couple reasons why an investor may use a buy on stop one of those reasons is to buy on upward momentum if a stock you're interested in buying starts rising and you believe it will continue to rise then you may use a stop for example if you see that a stock rose to $60 and you believe it will only continue to rise if it passes 62 dollars then you may enter a buy on stop with a trigger price of 62 dollars once the stock rises to or above 62 you will buy the stock at the prevailing market price if you just enter a trigger price then your buy order is a stop market if you enter a trigger price as well as a limit price then it's a stop limit with a stop limit once the price gets triggered then a limit order is sent to purchase the stock at the limit price or cheaper another reason why some may use buy on stop orders if they are short selling a stock with the goal of making money when the price drops buying a stop order in this case may help provide them with more protection if the stock goes up in price it could potentially lead to a lower return as you can see stop market and stop limit may offer a little more flexibility to an order potentially more than with a market order and a limit order you may be able to add more flexibility by using a trailing stop this is because a trailing stop works exactly as it sounds it trails or follows the movement of the stock price remember that with a stock market sell order you enter a trigger price below the market price of the stock if the stop drops to or below the trigger your sell order is filled the trigger price that you set with stop market and stop limit are fixed prices no matter how high or low the stock goes the trigger price will be the number you set it to unless you later went back to change your order but with a trailing stop sell order the trigger price automatically Rises and follows the stock price let's see how this works if you own stock that is currently $50 you may enter a trailing stop market sell order with a trigger Delta of $1 Delta represents the change in price that you would like the order to track for example a delta of $1 means you're looking for a $1 drop in stock price from the current market price so if the stock costs $50 now your order will trigger when it falls by $1 to $49 the system automatically calculates this value once the order is sent through our platforms what if the stock rises instead of false if the stock moves from 15 to $55 without ever dipping down to $49 the $1 Delta means you are still looking for that $1 drop in price this means that your sell order may be triggered at $54 now not 49 like before if the stock keeps rising and eventually goes up to $100 the new trigger is you guessed it $99 one dollar less than 100 the price only gets adjusted when there is upwards movement on a sell order and it's the opposite case on a buy trailing stop order a trailing stop market order can enable you to sell your stock whenever that stop drops by one dollar or more if the stock rises the trigger price automatically adjusts upwards and continues to wait for that one dollar drop in stock price this can help investors to lock in potential profits while also helping to protect from any downward movement in what broker you may enter a delta in dollars or as a percentage if you set a trailing stop Delta at 5% for example then the order is triggered once the stock drops by 5% or more as you can see stops and trailing stops may provide more flexibility to manage orders but like anything related to investing it's important that you take time to understand how these order types work and that you're comfortable with the nuances [Music] you

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Keywords: Stop market order, stop limit order, stop market vs stop limit, trailing stop market, trailing stop limit, trade, trading, invest, investing, TD Bank, TD Direct investing

Id: _EEvTGA-K6Q

Length: 10min 19sec (619 seconds)

Published: Fri Jan 10 2020