Basics of Stock Trading

Terminologies

Market Order : Security is executed at market price.

Limit Order : Security is executed with price specified as Limit Price.

Stop Loss

A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit) or a limit order (fixed or pre-determined price).

Stop Loss – Limit order

Stop loss limit order is an combination of stop loss order and limit order.

 

Explanation with examples.

Stop loss is used when the market is trending in opposite direction.

Eg 1: Selling of Stock

when a stock is sold a higher price is always expected. Which is controlled by the limit price . But lets assume that the market is trending in the opposite direction , in this case the limit value is not reached. In order to minimize the loss you may decide to sell the stock at a lower price which is controlled by the Stop Loss. Stop loss limit order decides the band in which the stock can be sold.

Expected Selling Price ( Limit Price) : 150

Current Stock Price : 100

Stop Loss Price : 75

Stop loss limit price : 70

 

Eg 2 : Buying of stock

Stock is always bought at a lower price. This can be achieved using a limit order.

In case if the stock is to be bought in a upward trending market a stop order is placed , which can be a market or a limit order.

Expected Buying Price ( Limit Price) : 150

Current Stock Price : 200

Stop Loss Price : 210

Stop loss limit price : 220

 

Conclusion:

Sell Limit Price is used when stock is to be sold at a price higher than the current market price.

Buy Limit price is used when the stock is to be bought at a price lower than the current market price.

Sell Stop price is used when stock needs to be sold in a trending market in the opposite direction. Stop loss sell price is less than the current market price.

Buy stop price is used when stock needs to be bought in a trending market in the opposite direction. Stop loss buy price is always greater than market price.

Stop loss price should be between the current market price and the limit price.

 

 

Reference Documents:

https://www.youtube.com/watch?v=jPIL8ncYb6Y

http://www.tradingpicks.com/stop_loss.htm