Watch the video below to get a better understanding of stop orders and how they can be utilized to help diversify your investment approach. If you’d like to learn more about stop orders or this specific strategy, see below for more details!
A stop order is defined as an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy-stop order is entered at a stop price above the current market price. A sell-stop order is entered at a stop price below the current market price. Investors generally use a sell-stop order to limit a loss or to protect a profit on a stock that they own. A stop/limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, a stop/limit order becomes a limit order that will be executed at a specified price (or better).
For a shorter definition, we’d say a stop order is a stock buy/sell request triggered at a set price. Buy stops are above the market, sell stops are below, used to limit losses or protect profits. A stop/limit order combines features, converting to a limit order at a specified price when the stop price is reached.
In this video, Ed Butowsky went over a stop order with the goal of increasing the stop order price by 1/3 of the cost basis. This is a unique strategy that would allow the shareholder (investor) to continually increase the amount of stock they own up to a given price – here in this video we chose $100.
Why would someone ever use a stop order?
Here are just a few reasons why an investor might consider a strategy like this:
- Capture Gains: Allows investors to capitalize on upward price movements and lock in profits as the stock price rises.
- Risk Management: Provides a flexible way to manage risk by automatically adjusting the stop price to limit potential losses as the stock value fluctuates.
- Trend Following: Aligns with a trend-following strategy, allowing investors to stay invested in a stock as long as it continues to trend upward.
- Emotion Control: Removes the need for constant manual monitoring and decision-making, reducing emotional biases in trading.
- Protect Profits: Safeguards accumulated profits by adjusting the stop price to sell if the stock price reverses, preventing substantial losses.
- Efficiency: Offers an automated approach to continuously adjust stop orders, saving time and effort compared to manual monitoring and adjustments.
As mentioned, always be considerate of your risk tolerance, goals, and time horizon when investing. The goal of this video is to inform you that there are several options at your disposal, but they should be used wisely and with much consideration.
If you’d like to learn more about Ed Butowsky’s investment strategy, you can schedule a Zoom with him today by clicking here.
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