SEC Investor Education Office Offers Advice on "Stop" and "Stop-Limit" Orders

The SEC Office of Investor Education and Advocacy ("OIEA") issued a bulletin offering advice to investors about when to use "stop" and "stop-limit" orders to buy and sell stocks.

The OIEA recommended that, when using a "stop" order, investors consider the following factors:

• The stop price is a trigger that causes a stop order to become a market order. For that reason, the execution price for a market order received by an investor can deviate significantly from the stop price, especially in a fast-moving market where prices change rapidly.

• A stop order could be triggered by a short-term, intraday price that might lead to an execution price that is substantially worse than the stock's closing price for the day.

• Different brokerage firms have different standards for determining when the stop price has been reached (e.g., the last-sale price versus the quotation price).

In addition, the OIEA urged investors to keep the following factors in mind when using a "stop-limit" order:

• The stop price is a trigger that causes a stop-limit order to become a limit order that will be executed at a specified price. As in the case of all limit orders, a stop-limit order may not be executed if the price of the stock moves away from the specified limit price.

• Like stop orders, a stop-limit order can be triggered by a short-term, intraday price that can result in an execution price that is inferior to the stock's closing price for the day.

• Different broker firms might have different standards for determining whether the stop price of a stop-limit order has been reached, as they might have different standards in making the same determination for a stop order.