The SEC Office of Investor Education and Advocacy ("OIEA") described the differences between "stop," "stop-limit" and "trailing stop" orders. In an educational bulletin on buying and selling stops, the OIEA stated:
- Stop Orders, also known as "stop-loss" orders, can be used to buy or sell a stock when the price reaches a certain point. Investors use buy or sell stops to try to limit losses or protect profits. The OIEA warned investors to be aware that execution price and stop price will not necessarily be the same, as stop orders merely serve as triggers for the stock to become a market order. Thus, market fluctuations can cause the execution price to deviate from the stop order price.
- Stop-Limit Orders function as a combination of stop orders and limit orders. Unlike stop orders, stop-limit orders allow investors to set a price at which a transaction can be executed. The OIEA cautioned that stop-limit orders may not be executed if there is significant price movement in a short period of time.
- Trailing Stop Orders are stop orders or stop-limit orders that are not specified as a price amount. Rather, the stop price is set as either a percentage or dollar amount above or below the market price. If the price of a security changes favorably, stop price continues to trail the market price. However, if it moves unfavorably, the stop price remains static, and the order is initiated when the price meets the trailing stop price.
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