Stop Order

An order placed below one’s purchase price (or above the price one shorted the stock at) that will be executed and turned into a sell at market (cover at market) order if the price falls (or rises) to that level.

A stop order is used by traders to limit losses. Some traders use mental stops, which are stops that are discretionarily executed by a trader after the price has reached the pre-determined level. This may cause trouble for undisciplined traders who cannot cut losses when the price hits their mental stop.

It is important to note that some investment strategies do not require stops. Warren Buffett doesn’t use stops when he buys a stock. That is due to his unique investment strategy based on a company’s fundamentals.