A hard stop is an investment strategy where a price level is set to trigger the sale of a security if reached. It prevents investors from losing money and can be used to earn a profit. The type of order created using a hard stop varies, but it remains in effect until executed or canceled.
A hard stop is an investment strategy that involves setting a price level that triggers the sale of the security if that level is reached. Sometimes referred to as a good until cancellation approach, investors sometimes set this type of limit order in place as a means of ensuring that the stock is sold before the price can fall below what the investor has determined it to be. an acceptable level. Depending on the nature of the security, the hard stop may be the basis for issuing a stop-limit order which the broker can execute automatically, without the need to consult the investor beforehand.
One of the benefits of establishing a permanent stop is that it prevents the investor from losing money on an investment. For example, if a round lot of a given stock is purchased for $100 US Dollars (USD) per share, then subsequently increases in value to $125 USD per share, the investor may choose to set a hard stop of $110 USD for action. This helps ensure that some sort of return is made, even if the trend with the stock reverses at some point. This strategy means that the moment the limit order is filled, the investor not only recoups the original investment but also earns a profit of $10 USD per share.
The type of order that can be created using this hard stop will vary slightly. With some investments, brokers and dealers will not accept a stop-limit order, but will accept a limit order or a 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 has fallen within the designated range, without waiting for the minimum acceptable price to be reached. With a stop order, the stock would only be sold when the price reached the specific rate identified by the investor as a hard stop.
It is important to note that an order that includes a forced stop remains in effect until it is executed or the investor chooses to cancel the order. If the value of a given security never falls to the hard stop level, the order remains active, but is never actually placed by the broker who holds it. This approach makes it very easy for investors to set limits and focus on other projects, rather than having to monitor the stock’s movement on an ongoing basis.
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