Investor's Guide to placing stock orders (part 3)
Stop Loss Orders
Another type of order
is the "stop-loss" order, which is a market order that is triggered
when a stock trades at or below a pre-specified price known as the stop price.
For example suppose that you own some stock that is currently selling for $60
per share. You expect it to increase in value but fear that if it starts to
go down, perhaps on the announcement of bad news, then it will continue to
slide further. In that case, you may wish to place a stop-loss order to sell
the stock at market with a stop price of $55. Note that the stop price
is very different from the limit price of a limit order. With a limit order,
you will get the limit price or better, or the trade will not take place. With
a stop-loss order, the fall of the stock price to the stop price triggers the
order. However, stock prices do not always move continuously, so that the stock
price may have fallen below the stop price before your order is filled. An
investor can also place a stop-limit order; such an order is triggered by the
stock reaching the stop price, but will not be executed unless a price better
than the limit price can be obtained.
Once again, the different market mechanism used on NASDAQ means that stop orders are treated differently than on the exchanges. Stop orders on the exchanges are usually left with an exchange specialist. However, since the NASDAQ market does not centralize the orders through a specialist, there is no place to leave the order. Although some brokerage firms will hold the stop order in-house and place it as a regular order when the stop price is hit, other firms will not handle stop orders for NASDAQ-listed stocks.
