In a perfect world, you’d know what was going on in the market at all times. However, while no one can watch all their stocks around the clock, buy stop orders are here to help.
What is a buy stop order? It tells your broker to buy a given stock once it hits a specific price (above the current price). When used carefully, these orders can help sharpen your trading strategy.
How Does a Buy Stop Order Work?
Through a setting on your brokerage account, you can establish a buy stop to be triggered when a given stock hits a certain price that’s above the current market price. Once that buy stop is set off, you’ll automatically purchase a predetermined number of shares.
That order will be placed immediately. But because stock prices rise so rapidly, you may end up paying slightly more per share than the market price was when the order was placed. For instance, the buy stop could be triggered when the stock hits $5.90 per share, but you may end up actually paying $6 per share.
What is a Buy Stop Order For?
Usually, when a trader places a buy stop, they are trying to accomplish one of two main objectives:
- To profit off a rising stock price by purchasing when it first begins to rise
- To protect against losses from a short position on the stock
The automated buy stop order lets you take action fast enough to maximize profits or minimize losses. For example, if you buy a rising stock as early into its rise as possible, you may be able to sell it for a greater profit eventually.
Example of Placing a Buy Stop Order
Suppose that you’ve invested in a specific stock that usually trades for about $11 to $12 per share. But through your own market research and analysis, you’ve come to believe that share prices will rise in the near future.
You could just purchase more shares now and wait. But what if your prediction is wrong? The best course of action is to set a buy stop order. If the stock’s share price hits $12.50, you will automatically purchase 100 shares.
The price of the stock might continue to rise. Thus, if you wish, you could sell the shares you just bought and turn a profit.
That’s not the only reason to place a buy stop order, however. It’s also a great way to cover short positions. Let’s go back to the same stock. But instead of betting on a price-per-share increase, you’re betting on a decrease.
If that prediction turns out to be wrong, you might have major losses to face. So to protect yourself if the stock rises instead of falls, you might set up a buy stop order. That way, the profit you turn could offset at least some of your short-position losses.
How to Place a Buy Stop Order
A buy stop order can make a meaningful difference in your trading strategy, but only if you implement it the right way. There are a few things you should know before placing one.
Identifying Resistance Level and Timing the Order
Getting a feel for the support and resistance level of the stock you’re looking at can be helpful. Support refers to when prices stop falling during a downtrend, and resistance is when they stop rising during an uptrend.
Either point provides traders with a chance to bet on which way the stock will go next. And if you’re getting ready to make that bet, it’s wise to look at the stock’s past performance.
If the stock typically hits a resistance plateau and the price shoots up again, placing a buy stop order is a good move. If the price usually drops after a period of resistance, you probably shouldn’t place an order.
Identifying the resistance level is critical for timing your order. Many investors see support and resistance levels as a good time to enter or exit a given stock. If you want to be able to buy shares as soon as they rise, placing a buy stop order a bit above resistance level (if you haven’t already) is the best way to go.
Placing an Order Through Your Brokerage Account
If you’re ready to place a buy stop order, you can do so through your online brokerage account. Accounts may have slightly different processes. But in most cases, you need to go into your account, select the ticker for the stock you want and choose BUY from the menu.
From there, you can select the order type as a stop (usually abbreviated as “STP”) and enter your stop price. You can also set the time period during which the buy stop order should remain in force.
Buy Stop Orders vs. Other Types of Orders
To really understand what a buy stop order is, it’s important to look at how it differs from other common types of orders.
- Market orders: These are orders to immediately buy or sell a given stock.
- Stop-loss orders: These automatically sell a stock if it drops below a certain share price.
- Limit order: These orders automatically buy or sell a given stock if it’s at a certain price or better.
One important factor to remember is that a buy stop order, like a stop-loss order, is triggered by a specific price (or stop). With limit orders, a stock purchase or sale is only triggered if the stock price falls into a specified range.
Tips for Using Buy Stop
As with every aspect of investing, there’s a little bit of a learning curve involved with buy stop orders. For instance, make sure you set the stop above market price or the system might trigger an immediate buy. And don’t set the stop too close to the current price. It’s best to leave some breathing room for the price to fluctuate.
Make sure to take your time analyzing past performance and looking for trends in support and resistance before setting your stop. It’s also best to put your stop right in the middle of a resistance level, as there’s still time at that point for the stock to drop.
If you’re new to investing, a financial adviser may be helpful. You also can find expert trader advice in Benzinga’s forums.
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Plan Ahead with Buy Stops
The best traders don’t just react — they trace trends and look ahead. And buy stops are a great example of how planning ahead can help you profit in the end.
Of course, this is just one of countless tools and strategies at your disposal. If you’re ready to develop as a trader like never before, check out the helpful resources Benzinga has to offer.
Frequently Asked Questions
What is a trailing stop limit buy order?
This order type lets you set something called a trigger delta or the amount above the current market price that a stock needs to rise before you buy. The brokerage account constantly recalculates this value, so you don’t have a set stop as you would in a buy stop order.
What is a buy stop for?
A buy stop order is designed to help investors buy a specific security once its price has risen to a certain level. It can help investors take advantage of rising stock prices early in the trend.
How does a buy stop work?
With a buy stop order, you select your stop or the price at which your order will be triggered. The stop has to be above the current market price. Once the stock reaches that price, you automatically buy a set number of shares.
About Sarah Edwards
Sarah Edwards is a finance writer passionate about helping people learn more about what’s needed to achieve their financial goals. She has nearly a decade of writing experience focused on budgeting, investment strategies, retirement and industry trends. Her work has been published on NerdWallet and FinImpact.