Friday, 18 October 2013

'Stop Buy Order'

In a previous article I had explained the significance of 'Stop Sell Order'. In this article I will be explaining the details of a 'Stop Buy Order'.

As the name says, 'Stop Buy Order' is useful for a trader who wants to 'buy' a particular stock.

Similar to 'Stop Sell Order', 'Stop Buy Order' has 3 factors:
1. Stop price - the price at which you want to your stop order to become a limit order.
2. Stop limit - your 'bid price' for the limit order. (optional most of the time)
3. Quantity - the number of shares you would like to buy.

When the 'Stop Price' is triggered, the 'Stop Order' becomes a 'Market Order'. But in the presence of a 'Stop Limit' price, when the 'Stop Price' is triggered, the 'Stop Order' becomes a 'Limit Order'.

Suppose the price of a stock increases. By placing a 'Stop Buy Order' we can avoid paying a higher price. Suppose a stock is trading at $10.00 and you are deciding whether to buy at this price or wait for it to decrease further. However, there is a possibility that the stock price goes higher than $10.00. In this scenario you might end up paying a price which is much higher than $10.00. However, by placing 'Stop Buy Order', with a Stop price of $10.10, Stop limit of $10.10 and a quantity of 100, the maximum price you may pay for the stock is $10.10!

We do not need to keep checking the prices all the time to place a buy order. Stop order will take care of it.

No comments:

Post a Comment