What distinguishes a stop buy order from a stop loss order?

• A. A stop buy order sells securities while a stop loss order buys them
• B. A stop buy order is protective while a stop loss order is not
• C. A stop buy order executes after a price increase while a stop loss order after a decrease
• D. No distinction exists between the two orders

Answer: (C)

A stop buy order is specifically designed to execute after the price of a security has risen to a certain level, signaling that upward momentum may continue. This order is typically used by traders who want to capitalize on potential price increases, indicating a shift in market sentiment that could lead to further gains.

In contrast, a stop loss order is executed once the price of a security falls to a predetermined level, aimed at limiting an investor’s potential losses on a position. This order serves as a protective measure against declining prices by automatically selling the security to prevent further losses when the price drops.

The distinction between these two types of orders lies in their respective functions and the market conditions that trigger them: a stop buy order activates on a price increase, while a stop loss order activates on a price decrease. Understanding this difference is crucial for traders as they strategize their entry and exit points in the market.