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Stop Orders: Limit your Losses and Protect your Profits

When equity markets are volatile, as they are today, the risks can keep you on the sidelines. However, you understand that prime opportunities arise under these conditions. How do you build the confidence to stay with a stock, especially if you can't monitor the markets constantly throughout the day?

One effective tool is the Stop Order, an instruction you preprogram online, usually to initiate a Sell Order at a specified price, or threshold. You can set a Stop Order when you first purchase a stock, or anytime afterward, giving you two critical options:

Minimize your losses when a stock price falls farther below a price that you are willing to accept.

Protect your profits when a stock price, rises from your initial buying price, then falls farther than you are willing to accept.

BMO InvestorLine offers three different types of Stop Orders, so you can choose the one that best supports your strategy and risk tolerance.

Sell on Stop Orders

Sell on Stops are the simplest, because they're always set below a stock's current market price. If you set a Sell on Stop when you purchase the stock, you'll minimize downside risk. Alternatively, set it after the stock price has already risen, and you'll secure your profits in the event of a downturn.

Here's how it works: if the price of your stock drops to the specified Stop Price, your Sell Order is triggered as a market order on a best-efforts basis, at the market price.

Trailing Stop Order

Think of a Trailing Stop as a floating Sell on Stop. It follows, or trails, a stock's price as it rises. You specify your preferred margin of downturn, for example 20 percent below the current market price. Based on this, your Stop Price is recalculated upward each time a new closing high is reached. If the stock's price begins to fall and hits your calculated Stop Price, your sell order will be triggered.

If the stock never exceeds your original purchase price, your Trailing Stop will act like a Sell on Stop, limiting your losses when the price falls to your calculated Stop Price.

Trailing Stops remain in effect until filled or cancelled. This exit strategy suits the long-term investor, providing a "set it and forget it" plan that lets you go to work knowing your boundaries are in place.

Buy on Stop Order

A Buy on Stop is useful for self-directed investors who use the technique of short selling. It's the mirror image of a Sell on Stop, because the Stop Price is always set above a stock's current market price. If you hold a short position and set a Buy on Stop when you short-sell a stock, you'll protect against upside risk. Or set it after the stock price has already fallen, and you'll secure your profits in the event of an upturn.

A further strategy for Buy on Stops applies to investors entering into long positions. If a stock price rises higher than anticipated, a Buy on Stop automatically triggers a further share purchase, amplifying the rally's positive effect.

While Stop Orders are important tools in volatile markets, they can be useful for most investing strategies. Investors are often comfortable buying low, but not always as diligent about selling high to realize their profits. Stop Orders can introduce a sell-side discipline that can make investing more efficient and rewarding.

Access Stop Orders under the Products and Services section for more information, including tutorials, detailed instructions and examples.

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