Fine points of stop orders or stop loss orders

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One of the common terms you’ll hear in trading is “stop orders”. These can be confusing to some people, and it’s important to understand the terminology correctly, or you may end up with your ass in a sling. The main idea behind a stop-loss order is sound: it’s a failsafe plan to execute a trade in case of a failling market. The intrepid investor will be back on the sidelines, safely in cash, should a disaster strike the company.

The main trouble with stop-loss orders is: they don’t always work, or if they do work, they don’t work exactly as intended. Some of this confusion comes from the terminology used by brokers, and the way they handle their trades. Stop loss orders come in two shapes and sizes:

1) Stop limit orders - executes when your bid price or better is reached
2) Stop market orders - sells immediately at the market price when your bid price is reached

Make sure you know what kind your brokerage offers. They may have different fee schedules or behavior, so check carefully. The SEC has a specific warning concerning limit orders that’s worth your perusal as well.

Usually nothing dire will happen because of a stop loss order. They really should execute at your specific bid price in 90% of cases or more. The main concern is to just chec the specifics of your brokerage, because stop loss orders are not usually handled in a uniform way.

Also check the price difference between market and limit orders. Market orders may be sufficient for infrequent traders on certain issues, but you need to know the specifics of the trade. Sometimes the cheaper priced trade won’t afford you any protection when you most need it.

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