Gather in the Stops: An Investment Strategy
There are essentially two types of stop orders, being “buy stop” and “sell stop”, where the latter, usually referred to as a stop-loss order, guards against losses by going into effect when the stock price drops below the purchase price. A buy stop order, on the other hand, goes into effect when an investor is engaging in a short selling.
When an investor decides to gather in the stops, it is with the goal of either causing a decline or increase in a specific stock price. This is achieved by selling a significant amount of the stock, causing the price to go down, or buying in order to inflate the price. If an investor gathers in the stops by selling, with the price dropping as a result, stop-loss orders will be activated and the price of stock will decline even further. Conversely buying stocks and raising stock prices will trigger buy orders, with the stock price climbing even further.
This strategy is generally employed to drive stock prices down, allowing investors to buy them at a reduced price in order to sell once the price has risen. The downside of this strategy is that it can have a snowball effect and run out of control. In that case the exchange has the option to suspend stop orders for that particular security.
While stop loss orders are not a pre-requisite for trading on the stock market, they are generally a good idea. As the name suggests, putting a stop loss order in place can limit losses in the event of a drastic price reduction, which can prove invaluable if someone decides to gather in the stops.