What's a stop-buy order?
Unlike limit buy orders, where you attempt to buy shares at a lower share price, stop-buy orders enable you to buy shares at a higher share price. Yes, we said that right! Stop-buys allow you to ‘buy high’, which may seem like an odd thing to do when the conventional wisdom is to buy shares for the lowest price possible.
Many investors will never use stop-buy orders, and they are controversial. If you’re following a dollar-cost averaging strategy, or are a long term investor who’s not at all interested in short term price changes, you can safely ignore them!
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How do they work?
When you make a stop-buy order, it’ll turn into a market order as soon as the share price hits the one you entered. That means that you may not get the price you want, you’ll just get the best available price once your stop-buy order is triggered and your order is placed.
For example:
You place a stop-buy order for Company X at a share price of $120
Their share price hits $120
Your stop-buy order becomes a market order and is placed in real time.
💡 Note: If the price leap-frogs from $120 to $125 (or $150 etc.), that’s the price you’ll pay to buy your shares.