ShmoopTube

00:00

Finance a la shmoop... what are buy stop and sell stop orders? buy stop buy stop

00:09

sounds like Amazon daily deals right well a buy stop order is sort of in that

00:15

realm it automatically executes a buy order if the stock hits a certain price [Buy stop definition appears]

00:20

usually above where the stock is today like apples trading at 180 bucks a share

00:25

you think iPhones are dead, done, over... the new Tesla phone's gonna eat their lunch

00:30

so you short Apple meaning that you virtually sell the shares of Apple

00:34

betting that their stock will go down from the hundred eighty bucks a share it

00:38

sits at today but you might be wrong so to save yourself from having to go to

00:42

the poor house if Tesla phones explode after a certain ringtone or end up [Man holding Tesla phone and phone explodes]

00:47

melting for whatever reason you have a buy stop order along with your short of

00:52

Apple at 180 bucks such that the buy stop executes at $200 a share in this

00:59

way the most you can lose on the short forgetting the borrow or the cost of

01:02

interest on the loan from the brokerage you'll take out too short those

01:06

Apple shares well the most you can lose then is 20 bucks a share a sell stop

01:10

works the same way times negative one meaning you just inherited a million

01:16

shares of caterpillar Tractor Company from old Uncle Albert who kicked the [Uncle Albert gravestone appears]

01:20

bucket and we're so sorry as he was walking home you know from where he

01:24

parked his tractor and then fell and hit his head on a rock and died yeah that's

01:28

Uncle Albert alright well CAT is trading at 50 bucks a share and you think you

01:32

want to slowly trim it in small sales over the next 20 years to fund your life [CAT stock trimmed by scissors]

01:38

as a sculptor that's what the French literature majors do - as long as CAT is

01:43

over say 40 bucks a share well you think you can live a long time on uncle Al's

01:48

dough but if it fell cataclysmically below 40 well you'd have issues paying

01:54

your rent as a sculpture they're like you wouldn't even be able to afford clay [Person sculpting clay ornaments]

01:57

any longer and would have to start sculpting in playdough and that's just

02:00

no fun... so you initiate a sell stop order at 40

02:05

bucks so that if the stock ever did dip to 40 well it would sell the shares

02:10

automatically and you're done all his now your remaining CAT shares would be

02:15

turned into cash so what happens if the stock closes one night at 41 dollars a

02:20

share you know down from the 50 where it was when you inherited it but then the

02:24

company announces a horrible quarter with a Chinese competitor coming into [Chinese competitor tractor company appears in newspaper page]

02:28

the market for half the price of their tractors well that Chinese product is

02:32

all electric and a hundred percent robotically driven in the CAT union

02:36

contracts won't let them downsize fast enough to compete and CAT opens the next

02:42

morning at 35 bucks a share well you put the sell stop order in at 40 do you get

02:47

the 40 bucks a share or a different price?

02:50

well no tough luck limit orders like this aren't guaranteed by the brokerage

02:54

they're more of a trigger to then transact up most likely you'd only get

02:59

35 bucks a share on your sell stop order oh well and yeah you're not a winner [Man crying on gameshow]

03:04

about hopefully you'll look get some nice parting gifts there good luck, buy stop

03:08

sell stop, do it...

Full Transcript