good till canceled and trailing stop orders

In short

A friend of mine once placed an order on a Monday, forgot about it, and found it had filled three weeks later at a price he no longer liked. A good till canceled order stays open until it fills or the investor cancels it. A trailing stop is a sell trigger that moves up as the price rises and stays put when the price falls. If you are holding a stock and want to protect a gain, a trailing stop can do that without constant watching. Neither order guarantees a price. Each broker sets its own rules on how long an order may stay open. Read your broker's order ticket before you press the button.

The whole of it

What it is

I once watched an old farmer set a fence post, then lean on it for a good while to see if it would hold. An order to trade works much the same way. You set it, and then you find out what it does.

Most orders are day orders. A day order expires at the close of the trading day if it has not filled. A good till canceled order, often written GTC, is different. It stays open across many days until it fills or the investor cancels it. Many brokers put a limit on how long, such as sixty or ninety days, and some cancel the order on their own after that. The broker sets that limit, not the law.

A trailing stop is a kind of stop order. A stop order is a sleeping instruction that wakes up when the price reaches a set level. Once awake, it turns into a market order, which means it sells at whatever price the market offers next. The trailing part means the trigger level follows the price. The investor sets a gap, either a dollar amount or a percent, and the trigger stays that far below the highest price reached since the order began.

How it works

If you have ever left a porch light on a timer, you know the feeling of letting a simple rule do the watching. Let us walk through both orders in plain steps.

With a GTC order, the investor picks a price and a side, buy or sell. Say the order is a limit order, which only fills at the chosen price or better. The order sits in the market. If the stock never reaches that price, nothing happens. The order waits, day after day, until the broker's time limit runs out or the investor cancels it. That waiting is the whole point, and also the whole risk. A price set in March can be a poor price by April, and the order does not know the difference.

With a trailing stop, the investor sets a gap below the market price. Suppose a stock trades at $50 and the gap is $5. The trigger sits at $45. If the stock climbs to $60, the trigger moves up to $55. If the stock then slips to $58, the trigger stays at $55. It never moves down. When the price touches $55, the order wakes and becomes a market order to sell.

Here is the catch that surprises people. The sale does not happen at $55 exactly. It happens at the next available price. In a fast market, or after a gap overnight, that price can be well below the trigger. The trigger is a starting gun, not a promise.

The numbers, and where to find yours

I once asked a neighbor what his broker charged for a trade, and he laughed, because he had never looked. Do not be that neighbor. Three numbers matter here.

The first is how long your broker keeps a GTC order open. This is set by the broker, so look in the broker's order types page or the help section. The second is whether your broker allows trailing stops on your type of account and on the securities you hold. Some do not offer them for every product. The third is the cost of a trade. Many brokers now charge $0 in commission on stock trades, but the broker must still disclose its fees, and your own fee schedule is the place to confirm.

For the rules that govern how brokers must handle your orders, the Securities and Exchange Commission explains the basics on Investor.gov. FINRA, the Financial Industry Regulatory Authority, also publishes plain investor guidance on stop orders and the risks of using them. The SEC's Investor.gov site has a page on stop orders and trailing stops, and that is a good place to read the official description in the agency's own words.

No yearly dollar limit or legal age applies to these orders. They are tools, and the numbers that count are your own gap, your own price, and your broker's time limit.

A worked example

A woman I will call Maria bought 100 shares of a company at $40 a share. She paid $4,000 for them, because 100 shares at $40 a share is $4,000. A few months later the stock rose to $60. Her position was now worth $6,000, since 100 shares at $60 a share is $6,000.

Maria did not want to watch the screen all day. She set a trailing stop with a gap of $6. At the moment she placed it, the trigger sat at $54, because $60 minus $6 is $54.

The stock then rose to $68. The trigger moved up to $62, because $68 minus $6 is $62. The stock slipped to $65, and the trigger stayed at $62. Then the stock fell, and the price touched $62. The order woke up and became a market order.

In a calm market, her shares might sell very near $62. Say they sold at $61.80. Her proceeds would be 100 shares at $61.80 a share, which is $6,180. Her gain over her original $4,000 would be $6,180 minus $4,000, or $2,180.

Now picture a rougher day. The stock opens the next morning at $58, well below her trigger, after bad news came out overnight. The order wakes up and sells at $58. Her proceeds would be 100 shares at $58 a share, which is $5,800. Her gain would be $5,800 minus $4,000, or $1,800. That is $380 less than the calm case, because $6,180 minus $5,800 is $380.

Same order. Different outcome. Maria still kept a real gain in both cases, and she did not have to watch every tick. But the trigger price was never a guarantee.

Where it goes wrong

I have seen good people get bitten by a rule they never read. These are the places it tends to go wrong.

A GTC order can fill long after the reason for it has passed. The investor sets a buy price in January, forgets it, and the order fills in March after the company's situation has changed. The fix is simple. Keep a list of your open orders and check it.

A trailing stop can trigger on a short dip. Prices bounce around during the day. A gap that is too tight can sell a position on a brief drop that then recovers. The investor is out of the stock and the stock keeps climbing. That is a real cost, and it stings.

A stop does not guarantee the sale price. As Maria's rough morning showed, a gap down can fill well below the trigger. Some brokers offer a stop limit order, which sets a floor on the sale price. That sounds safer, but the order may not fill at all if the price falls past the floor. Each choice trades one risk for another.

Taxes can also surprise people. A sale that locks in a gain may create a tax bill. A sale at a loss may matter for tax purposes too. The Internal Revenue Service publishes guidance on the sale of stock in its Publication 550, and that is the place to read the official rules.

One more thing. Orders placed outside regular trading hours may not behave the same way, and some brokers do not let stops trigger in extended hours. Check yours.

Questions to answer before you leave this page

If you were to place a GTC order today, do you know how many days your broker will keep it open, and where you would look to find out? Have you written down the price and the reason for the order, so that you can tell in a month whether the reason still holds? If a trailing stop sold your shares at a price below the trigger, would you still be glad you set it, and how large a gap could you live with? Does your broker offer trailing stops on the account you actually use, and what does it charge for a trade? Have you read the SEC's Investor.gov page on stop orders and the FINRA guidance, so you know the official description and not just a friend's story? And if a sale created a tax bill, do you know where to read the rules, and who could answer the questions you cannot?