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Intro to Stock Trading

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5 of 10

Stop Order and Stop Limit Orders
Stop Limit Stock Trading

A sell stop order would allow an investor to avoid further losses or protect a profit if a stock drops below a certain level. The order then gets sent to the exchange and becomes a market order when triggered.

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In common parlance, stop and stop limit orders are known as “stop loss” orders because speculators use them to lock in profits from profitable trades.

A stop order automatically converts into a market order when a predetermined price is reached (this is referred to as the “stop price”). At that point, the ordinary rules of market orders apply; the order is guaranteed to be executed, you simply don’t know the price – it may be higher or lower than the current price reported on the ticker symbol.

Contrast that to a stop limit order, which automatically converts into a limit order (not a market order) when the stop price is reached. As discussed earlier in this tutorial, your order may or may not be executed depending upon the price movement of the underlying security.

Sell Short and Buy to Cover Orders

As you learned in The Basics of Shorting Stock, selling short is an extremely speculative practice that can, theoretically, lead to unlimited losses. It can also allow you to profit from a stock falling.

Here’s how it works: You think that Company ABC is grossly overvalued. Management is terrible, financial condition is deteriorating, the sales outlook is pitiful, and, you believe, the stock price does not fully reflect these apparent realities. You are convinced the stock is going to fall substantially from its current price of $10 per share.

How can you take advantage of the situation? Here's how ...

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