It's a way of purchasing a stock. Whatever.com is volatile. On any given day lately, it trades between $18 and $20. You have no idea if this thing is going to go to $40 or $4, but you want to roll the dice and own it. You want it now. Right now.
So you call your broker and you instruct her to purchase 1,000 shares of whatever.com at the market. The broker has a screen in front of her, with a live feed of market prices. She tells you that the market price is $18.38 at this moment, and that's the price at which you've just bought whatever.com. You bought it at a price that was at the market.
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Finance: What are Buy Stop and Sell Stop...10 Views
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...
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