SEC Issues Investor Bulletin Regarding Stop Orders
From the Desk of Jim Eccleston at Eccleston Law LLC:
The SEC’s Office of Investor Education and Advocacy has issued an Investor Bulletin to help educate investors about the difference between using “stop” and “stop limit” orders to buy and sell stocks. The bulletin states the following:
A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When this stop price is reached, a stop order becomes a market order. Investors generally use a buy stop order in an attempt to limit a loss or to protect a profit on a stock that they have sold short. Before using a stop order investors should consider that the stop price is not the guaranteed execution price for a stop order. Also, an investor should know that a stop order may be triggered by a short-term, intraday price move that results in an execution price for the stop order that is substantially worse than the stock’s closing price for that day. Finally, different brokerage firms have different standards for determining whether a stop price has been reached.
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 a stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price. The benefit being that the investor can control the price at which the order can be executed. Investors should consider that stop-limit orders may not be executed if the stock’s price moves away from the specified limit price and that the stop price and the limit price for a stop-limit order do not have to be the same price. As with stop orders, different brokerage firms may have different standards for determining whether the stop price of a stop-limit order has been reached.
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