Question

When would you use a stop-buy order?

Answer 1

A buy stop order will tell a broker to buy a security until it exceeds a pre-specified level. If the price reaches that point, either a cap or a market order becomes a buy stop, fillable at the next available price. For stocks, derivatives, forex or a variety of other tradable instruments, this form of stop order can apply. The buy stop order will serve a number of purposes with the underlying assumption that there will continue to grow a share price that climbs to a certain height.

Most generally a buy stop order is regarded as a device to defend against the potentially infinite losses of an exposed short position. An investor is able to open the short position to put a bet the the price of the security will go down. If this happens, the buyer will buy the cheaper shares and take advantage of the disparity between the short sell and the long position purchase. The buyer will hedge against an rise in share price buying by putting a purchase stop order to cover the short position at a price minimizing losses. The buy-stop is often referred to as a stop loss order when used to fix a short gap.