As growth investors/traders, more often than not we buy stocks as they break through a pivot, move through resistance or are otherwise increasing in price. Put another way, we buy on the way up.
To be notified when a target price is reached, you can set an alert with your broker or in your preferred trading platform. Once the price is met, if you’re online or have access to your broker via your mobile device, you’re good to go. If that’s not the case, a buy stop order may be a good option.
The primary reason for this post is clear up any confusion, and here’s why, with my broker, there isn’t option to place a buy stop per se. Rather, when I buy a stock, I have the option to choose one of the following order types: market order, limit order, stop loss or stop limit.
This post covers the two latter options and how they differ.
Buy Stop at Market Price
Again, using the terminology from my broker, if I were to initiate a buy, and specify an order type of stop loss, I am requesting to have my order filled at a specified price. For example, if a stock is currently at $98 and I’d like to buy it when it hits $100, I need to choose a stop loss as the order type.
Assuming adequate liquidity, the good news is, my order will be filled. With that said, it’s important to understand that I won’t necessarily be filled at the price of $100.
Once the target price is reached, my order becomes a market order, so it will be filled at the next available price, which could be well over my $100 target price. Also, if the stock were to gap up to $110, I may be filled at that price or higher.
Buy Stop with Limit
If you have a concern about being filled at a price much higher than you’d prefer to pay, a stop limit is an option – again, this is the terminology used by my broker.
Using the same example as above, if a stock is currently at $98 and I’d like to buy it when it hits $100, yet I don’t want to pay more than $103, this is where the stop limit comes into play.
What’s important to remember with this order type is that if the price gaps past the limit ($103 in this example), my order won’t be filled. Think of it this way, my order is limited to the price range of $100 to $103.
I do much of stock research in the evenings. Often times I know before the trading day begins at what price I’d buy a specific stock, this is where a buy stop is your friend. Even if I’m away from my computer, I know I can get into a stock close to the price point I’d like to pay (assuming there isn’t a gap up).
I’ve used the terms stop loss and stop limit in my examples. Chances are, your broker may use slightly different terminology. For example, another broker I am familiar with uses the terms stop market and stop limit
Do yourself a favor and familiarize yourself with the options that your broker offers and consider a buy stop if you’d like to place an order and not have to monitor the trade throughout the day.