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From our weekly newspaper feature:

Q. If I bought a stock at $20 that is now trading at $50 and I want to sell it only if it drops to $40 (locking in a 100% gain), what kind of order should I place? -- Alan Swinger, Saratoga Springs

A. You're describing either a "stop-loss" or "stop-limit" order. It's a little complicated, so read slowly. The "stop" activates the order if shares sink to a certain price ($40 in your example). The stop-loss order immediately sells the shares at the best price it can, while the stop-limit will only sell if the shares are at $40 or above. Here are the risks: if, perhaps due to bad news, the shares suddenly fall below $40 overnight and don't rise above that, the stop-loss will sell your shares for less than $40, while the stop-limit order won't sell the shares at all. Fools avoid both orders, as near-term volatility doesn't faze us.


To add a note...

You didn't mention another major option -- "at the market." When placing an order, you generally place it to buy or sell "at the market" which means the current going price, or you place a "limit" order, saying only buy if it falls below this or only sell if it rises above that. As noted above, limit orders sometimes mean you never get into or out of the stock as the stoick doesn't do what you expected. At the market orders mean you sometimes get a price you didn't expect.

In general, we like ordering at the market and not trying to eke out an extra quarter point. Once we know we want to own something -- for a very long time -- we'll buy it at the going rate.

Hope that helps!

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