What are stock broking stop & trailing stop orders?

A stop order, also known as a stop loss order, is a type of stock order where the trader can set a point to buy or sell a security once the price of that security reaches a trader specified fixed price. The trader fixes the price above the present market value in order to set up a buy stop order and below the current market value for a sell stop order. Stop orders can help to limit an investor's financial exposure within the market.

A sell stop order is essentially an instruction to a broker to get them to sell a security which is being held, at the best price currently available, should the market value drop below the pre-set stop price. These are traditionally used when investors "go long" in the hope of stock prices rising, and help to reduce any potential loss should the stock price fall beyond the fixed sell stop value.

A buy stop order is used typically to limit a potential loss on a short seller speculation, where an investor borrows and then sells a security in the hope of reducing the subsequent market price. Once the price falls, the investor can then buy the stock back at the lower price. This enables the trader to then return the stocks purchased to the lender, in order to profit from the difference between the original selling and repurchase prices. The buy stop order, which is always set above the initial market price, is automatically triggered when the stop price is reached, and is a call for the broker to cease purchasing stock; and so protect the investor against loss, should the price continue to rise.

While a standard stop order uses a fixed price to control when it becomes activated, a trailing stop order utilises a dynamic stop parameter. Investors using trailing stop orders specify a price difference or a percentage difference from a benchmark price position. This benchmark is the highest or lowest market price that the stock has reached since the stop order was placed. Trailing stops are used to protect profits as part of a risk management strategy, and will automatically adjust as the market moves in the investors favour. This type of order allows the trader to profit from any favourable movement within the market whilst at the same time having the protection of a stop order to prevent huge losses being accrued.

These days it is easy to find a large amount of information online about stock trading terms, through sites such as Wikipedia, it is important to note however that you need to ensure the validity of all information used to make any investments, in order to reduce the risk of potential financial loss. Many of the larger banks such as Barclays Stockbrokers (http://www.stockbrokers.barclays.co.uk/ ) offer regulated sources of information on subjects such as stock stop orders along with stock trading services (http://www.stockbrokers.barclays.co.uk/?usecase=whatweoffer&category=whatweoffer ) to all potential market investors.

Disclaimer:
All information contained in this article, is for general information purposes in the UK only and should not be construed as advice under the Financial Services Act 1986.

The price and value of investments and their income fluctuates: you may get back less than the amount you invested. Remember that how an investment performed in the past is not necessarily a guide to how it will perform in the future.

You are strongly advised to take appropriate professional and legal advice before entering into any binding contracts.

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