If you’re asking this question, it generally means you have a brokerage account and you want to know what type of order this is so you know how to use it correctly. I’m not only going to tell you what a stop on quote is but I’ll compare it to a couple of different order types that seem similar but can have very different effects on your order.
A Stop On Quote is an order type used in brokerages to buy or sell a stock or other security once it prices reaches or surpasses a specified price. Once the price is met, it is converted to a Market Order and executed. This order type is generally used to lock in profits or limit losses.
Other names for Stop On Quote are Stop Loss, Stop Order, and Stop Market Orders. Different brokerages refer to them differently. E-Trade calls these orders Stop On Quotes whereas TDAmeritrade calls them Stop Market Orders.
Now that you know how to define them, lets go into more detail on their use, why they’re important to understand and how they differ from other order types that may seem similar but are actually quite different.
Full Guide to Stop On Quotes
For those who like a more visual representation, check out this video from E-Trade which describes Stop On Quotes in only 3 Minutes! Then read on for more detail and examples.
Hopefully that helps you visualize what Stop On Quotes are. Now I’ll try and ensure its even more clear.
Your risk tolerance and investing strategy determine the types of orders you should be placing. Often times, long term investors are known as Buy and Hold Investors will never use Stop On Quotes. They simply buy the asset that they want and hold it for years. This is because their risk tolerance takes in account that even in large downward price movements, over the long term they fully expect the price of that asset to gain a profit.
Other investors may buy an asset and keep a closer eye on its price to ensure their positions are risk defined meaning that at any given time, they will only risk losing a set amount. Disciplined investors like this may have a rule that means any position they enter in the stock market will only at most risk a certain percentage of their portfolio so that one part of their portfolio can’t derail their investing plan.
What does Stop Price Mean?
The stop price is the price set for an order to be executed by a brokerage. It can be used in both buy and sell orders. If you set a sell stop price, you are telling the brokerage that you want to sell your position if it reaches a certain lower price than the current market. If you are setting a buy stop price, you are saying that you want to buy if the price reaches a price higher than the current market.
Uses of Stop On Quotes
There are four reasons to use a Stop On Quote:
- Sell Stop On Quote for Long Position: If you buy an asset for a certain price and place a sell stop on quote for a lower price, you want to lock in profits or define risk by selling at the lower price set to prevent further loss.
- Buy Stop On Quote for Long Position: If you set a Buy Stop On Quote for a higher price than the current market price, you want confirmation that the market is moving upward before you buy and once that price is met and confirmed, your order will execute.
- Sell Stop On Quote for Short Position: If you set a Sell Stop On Quote for a lower price than the current market price, you want confirmation that the market is moving lower before you perform a short trade. If that lower price is met, the short position will be entered
- Buy Stop On Quote for Short Position: If you are shorting a trade and the price moves, upward, setting a Buy Stop On Quote will exit the trade if the stock price reaches a set price above the current market price.
Example of Stop On Quote In Action
It’s example time and like all my examples, this one will be Star Wars based:
Senator Palpatine has a stock portfolio worth $100,000. He wants to invest $10,000 in a new manufacturing stock called Kyber Mines with stock ticker KYB (a fictitious company). $10,000 would be 10% of his portfolio so he’s worried that if something bad happens to this mining company, he will lose too large of his portfolio.
He buys 100 shares of KYB for a price of $100/share. He then places a sell order using a Stop On Quote for $80. This way, if the price drops to $80 or lower, he will sell his stock and only lose $2,000 ($20 x 100 shares) which is 2% of his portfolio. Even though he had $10,000 invested, only $2,000 was ever at risk.
Stop On Quotes are not perfect and here’s why. If the stock dropped to $40/share because 4 of the largest mines operated by KYB were destroyed, the sell order will be triggered but may execute at $40 depending on when his order is placed due to orders being filled before his. That means, he could log into his account and see $6,000 instead of $8,000 which would double the amount he was willing to risk.
How can you protect yourself when a Stop Order executes during a major sell-off? You can use a Stop Limit On Order. Other names for a Stop Limit On Order are Stop Limit Orders and Limit Stop Losses.
What is the Difference Between a Stop On Quote and a Stop Limit On Quote?
Often times, the Stop On Quote is mistaken for a Stop Limit On Quote. There is a pretty important distinction between these two orders. We’ve already detailed how to execute a Stop On Quote so let’s see what makes a Stop Limit On Quote different.
Stop Limit On Quotes are more advanced in the sense that once the stop price is reached, a limit order is then exercised. So rather than selling at the market value once the Stop Price is reached, You can still protect your assets and ensure it is sold at an acceptable price according to your selected Limit Price.
In the above example, since a limit wasn’t implemented, Senator Palpatine found himself losing a lot more than he had hoped for. If he had chosen a Limit Order, it would have looked something like this:
He would have used a sell order using Stop Limit On Quote as the order type. He would have selected $80 as the Stop Price and the Stop Limit would be $75 so that if the price dropped to $80, the limit order would be made active and sell as long as the price remains at or above $75. This way if he misses the sell-off and the price drives down to $60, his order will not be filled and he can hold it for a potential bounce. If the price later rises to $75, he will then sell at the price that he set as a limit.
Likewise, you can use Stop Limit On Orders to buy into a position that has momentum but protect yourself from buying in too high. Let’s look at a stock chart for this visual.
In this example, candle 1 closed at a price of around $58. If you wanted to buy into this stock but wanted to make sure it had the momentum to climb up in price, you may place a Buy Stop Limit On Order so that at Stop Price of $60, you would like to purchase shares but you would also like a Limit Price of $62 to protect yourself from buying it too high if it gaps to a price of $68.
In this example, it actually pays off because it does gap up to just above just below $62 so you would have probably had this order filled. If it opened at $65, it would need to drop to $62 in order for the trade to execute.
Final Thoughts on Stop On Quotes
Stop On Quotes are a great tool for managing risk and protecting your portfolio by allowing you to lock in profits or limit losses. Although they are sometimes confused with Stop Limit On Quotes, there are important differences to understand.
Overall, most long term investors don’t generally use Stop On Quotes but if you are investing with a short to medium-term time horizon, they may be a good order type to be familiar with.
I hope you found this helpful. If you are new to investing and want a guide to getting started buying your first stock, check out our guide on how to buy stocks for the first time. Good luck and let’s start investing!