A savvy investor sets a target price for a stock he wants to buy. When the stock reaches this price, the investor is ready to purchase it. Reasons for waiting for a certain price include making sure it's dropped low enough to be a bargain, or that it's risen high enough to indicate that it has broken through resistance. Both approaches are good reasons to use stop orders for buying stocks.
Calculate the buy price. Investors establish a price for purchasing a stock by looking at areas of resistance. For example, a stock that drops to a previous low is at "support." This is the point at which investors begin buying it again. If the stock hits that low a second time, buyers might step back in. An investor could determine that if the price rises 1 to 2 percent off that low, it's time to buy. Similarly, when a stock hits a previous high, it is at "resistance." This is the point where in the past, sellers stepped in and drove the price down. If the price breaks through the previous high, it might have overcome resistance. Investors can set a target price just above resistance to buy a breakout stock.Step 2
Place a stop order. One of the types of buy orders is a stop order. When an investor places this order, he enters the price he's waiting for the stock to hit. It will not become effective until the stock trades at the price the investor has determined. When it does hit that price, the order becomes effective and turns into what is called a market order. This means the investor will take the next price someone asks for the stock. The order will execute immediately.Step 3
Record the purchase price. It's unlikely that the investor's purchase price will be exactly the same as the stop-order price. This is because the stop price is a trigger: The investor gets the next price a seller asks for. This could be higher or lower than the stop price. To track profits or losses on the stock, an investor must use the actual purchase price as the basis.
- Investors who are waiting for a stock to hit a certain price might not get it the same day. They can indicate that the order is "good till canceled." This means the investor is willing to leave the order in place indefinitely. In practice, trading sites set their own policies about how long this type of order is good. They typically last 60 to 90 days.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.