Below The Market

Finance a la shmoop... what are buy stop and sell stop orders? buy stop buy stop

sounds like Amazon daily deals right well a buy stop order is sort of in that

realm it automatically executes a buy order if the stock hits a certain price [Buy stop definition appears]

usually above where the stock is today like apples trading at 180 bucks a share

you think iPhones are dead, done, over... the new Tesla phone's gonna eat their lunch

so you short Apple meaning that you virtually sell the shares of Apple

betting that their stock will go down from the hundred eighty bucks a share it

sits at today but you might be wrong so to save yourself from having to go to

the poor house if Tesla phones explode after a certain ringtone or end up [Man holding Tesla phone and phone explodes]

melting for whatever reason you have a buy stop order along with your short of

Apple at 180 bucks such that the buy stop executes at $200 a share in this

way the most you can lose on the short forgetting the borrow or the cost of

interest on the loan from the brokerage you'll take out too short those

Apple shares well the most you can lose then is 20 bucks a share a sell stop

works the same way times negative one meaning you just inherited a million

shares of caterpillar Tractor Company from old Uncle Albert who kicked the [Uncle Albert gravestone appears]

bucket and we're so sorry as he was walking home you know from where he

parked his tractor and then fell and hit his head on a rock and died yeah that's

Uncle Albert alright well CAT is trading at 50 bucks a share and you think you

want to slowly trim it in small sales over the next 20 years to fund your life [CAT stock trimmed by scissors]

as a sculptor that's what the French literature majors do - as long as CAT is

over say 40 bucks a share well you think you can live a long time on uncle Al's

dough but if it fell cataclysmically below 40 well you'd have issues paying

your rent as a sculpture they're like you wouldn't even be able to afford clay [Person sculpting clay ornaments]

any longer and would have to start sculpting in playdough and that's just

no fun... so you initiate a sell stop order at 40

bucks so that if the stock ever did dip to 40 well it would sell the shares

automatically and you're done all his now your remaining CAT shares would be

turned into cash so what happens if the stock closes one night at 41 dollars a

share you know down from the 50 where it was when you inherited it but then the

company announces a horrible quarter with a Chinese competitor coming into [Chinese competitor tractor company appears in newspaper page]

the market for half the price of their tractors well that Chinese product is

all electric and a hundred percent robotically driven in the CAT union

contracts won't let them downsize fast enough to compete and CAT opens the next

morning at 35 bucks a share well you put the sell stop order in at 40 do you get

the 40 bucks a share or a different price?

well no tough luck limit orders like this aren't guaranteed by the brokerage

they're more of a trigger to then transact up most likely you'd only get

35 bucks a share on your sell stop order oh well and yeah you're not a winner [Man crying on gameshow]

about hopefully you'll look get some nice parting gifts there good luck, buy stop

sell stop, do it...