What is a Time Stop?

Time stops are an example of instructions issued by an investor to a broker. Specifically, a time stop authorizes the broker to execute an order to exit a given position on a stock when a certain amount of time has passed. The time stop usually carries certain provisions that must be met in order for the order to be executed.

The idea behind a time stop is to allow the investor to see if the value of the investment is moving in a direction that is desired. Often, this means that the stocks or other securities cited are performing as the investor believed they would perform. In the event that the investment is not living up to expectations within a specified amount of time, the broker is authorized to sell the stock or security and look for other investing opportunities on behalf of the investor.

Investors make use of the time stop approach as a means of limiting risk with a given investing position. Since the main focus of investing is usually to make money, it is imperative that purchased securities do generate a return. By employing the time stop method, investors can quickly unload options that are not providing a desirable level of return, and look for a different option that is likely to perform up to expectations.

It is important to note that unless the stipulations set in place with the time stop are met, the broker is not authorized to execute the order. As an example, an investor purchased a thousand shares of a given stock for $14.00 US Dollars (USD) a share. A time stop is created, stipulating that if the value of the shares drop below $12.00 USD at any point within the first thirty days after the acquisition, the broker is to sell the shares immediately. If the shares have dropped no lower than $13.00 USD per share by the end of that thirty day period, the broker will not be sell the shares, since the value did not drop to the specified level within the specified period of time.

However, the investor is not bound by the terms of the time stop. If the investor at any time chooses to sell the shares during the period specified by the time stop, the provisional order is considered null and void. The broker will essentially abandon the time stop and follow the most recent orders issued by the investor.