What are stops and how should I use them

Every investor wants to take advantage of any opportunity to protect his investments. Investing is a tricky business if you do not know what you are doing. The wise investor understands the risks that should be taken and the security features that can be put in place to ensure a profit. Using stops is an excellent way to have some control over your risks.

In talking about investing, stops are also known as a "stop order" or "stop-market order". When a stop order that has been placed on a security reaches its limit, it means that that security has decreased to a price that is no longer acceptable to the purchaser of that investment. A broker is usually responsible to then sell that security (usually at the prevailing market price). A stop loss order typically has a 10% safety net. In other words, after the low cost limit is set the security can actually go as much as 10% lower than that price before the security is ordered to be sold.