Beware stop orders
by Marcy Gordon
Many ordinary investors don’t understand how so-called stop orders work in stock trading, experts say. Stop orders, or stop-loss orders, call for buying or selling a stock when its price reaches a specified level, the stop price.
At that point, a stop order becomes a market order – buying or selling at the best available price, usually immediately.
Stop orders carry risks. Regulators are wrestling with the issue. The stop price isn’t the guaranteed transaction price. It’s a trigger that turns the stop order into a market order. In fast-moving markets with prices whipping around, your transaction price may be far from your intended stop price. An unexpected price can be avoided by using another type of order, a stop-limit. But the limit price may prevent the trade from happening.
The risks featured in the “flash crash” of May 6, 2010, when over 20,000 stock trades went through at prices varying 60 percent or more from those 20 minutes earlier. Many retail stop orders, triggered by price declines, went into immediate selling mode in a market where buying interest fizzled.Associated Press