The stop price is the price that is associated with a stop order. The establishment of this price is very important when it comes to executing purchases or sales of a given stock or other security. Without the designation of a price at which to enter a trade of some sort, the broker is left with no way to carry out the wishes of an investor in regard to that particular security.
A stop order itself is simply a standing market order that provides the stockbroker with guidelines for the purchase or sale of a given security. In order for the transaction to function efficiently, the investor must provide the broker with a price at which some sort of trading activity should commence. When the current market value for that security reaches that designated stop price, the broker can then proceed to comply with the other terms outlined in the stop order.
In cases where the stop order is structured to allow for the acquisition of a given stock or security, the stop price identifies the point at which the broker should purchase a specified number of shares on behalf of the investor. For example, if the investors believes that a stock that is currently falling will shortly rally and begin to climb once again, he or she may set a stop price that is just before the value of the shares level off and begin to ascend. By purchasing shares at the stop price, the investor is positioned to earn a significant return after the limit order is filled and the value of each share of stock begins to rise once more.
The stop price can also be set to allow an investor to realize a maximum return on a given investment, selling it off just before it begins to fall in value. As with the acquisition of shares of stock, putting in a sell order that automatically activates when the stop price is reached means the investor manages to unload the shares while they are still performing well. However, he or she also avoids losing anything on the investment when the shares begin to decrease in value.
Arriving at a workable stop price means understanding the movement of a given security within the current market climate. Accurate projections on future performance make it much easier to buy stock when it is low but is likely to rise soon, as well as sell stock while it is still riding high but before the unit price per share begins to fall. From this perspective, the stop price can be seen as an extremely important element of trading strategy that creates a great deal of success when determined in a responsible manner.