A hard stop is an investment strategy where a price level is set to trigger the sale of a security if reached, preventing the investor from losing money. The type of order created varies, and the hard stop remains in effect until executed or canceled.
A hard stop is an investment strategy that involves setting a price level that triggers a security to sell if that level is reached. Sometimes referred to as a good approach until called off, investors sometimes place this type of limit order as a means of ensuring that the security is sold before the price can fall below what the investor has determined to be. an acceptable level. Depending on the nature of the security, the hard stop may be the basis for the issuance of a stop limit order that the broker can execute automatically, without the need to consult the investor in advance.
One of the benefits of setting a hard stop is that it prevents the investor from losing money on an investment. For example, if a round lot of a certain stock is purchased for $100 US Dollars (USD) per share, then increases in value to $125 USD per share, the investor may choose to set a hard stop of $110 USD per share. . Doing so helps ensure that some form of return is achieved, even if the trend with the stock reverses at some point. This strategy means that at the time the limit order is executed, the investor not only recovers the original investment, but also makes a profit of $10 USD per share.
The type of order that can be created with this hard stop will vary quite a bit. With some investments, brokers and dealers will not accept a stop limit order, but will accept a limit order or stop order. While all of these orders are similar, there are slight differences. A limit order sets a price range that must be met before the investor sells, while a stop order requires the price to be set at a specific amount. For example, a limit order would allow the broker to sell the stock once the price fell within the designated range, without waiting for the minimum acceptable price to be reached. With a stop order, the security would be sold only when the price reached the specific rate identified by the investor as the hard stop.
It is important to note that an order that includes a hard stop remains in effect until it is executed or the trader decides to cancel the order. If the value of a given security never falls to the hard stop level, the order remains active, but the broker never places it. This approach makes it very easy for investors to set limits and devote attention to other projects, rather than having to monitor security movement on an ongoing basis.
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