A:

A stop order and a market order are different order types that dictate how to enter and execute trades. Traders and investors use market orders if they want their trades done immediately, whereas stop orders are used if they want to buy or sell a security after it reaches a specified price.

A market order is an order type that allows traders and investors to buy or sell a stock at the best current available price. A market order only guarantees order execution. However, a market order does not guarantee a particular price at which the order will be executed. Since securities have bid and offer prices, a market buy order buys the security at the ask price and a market sell order sells the security at the bid price.

For example, a trader enters a market order to buy 100 shares of stock ABC when the bid price of the stock is $24.35 and the offer price is $24.37. The trader is long 100 shares of stock ABC at $24.37 and has a cost basis of $2,437.

Conversely, a stop order is used when traders or investors cannot monitor their positions and want to buy or sell a security once it reaches a specified price. A sell stop order can be used to sell a security after it reaches a specified price, where the order is then executed at the best market price on the next trade, and vice versa.

For example, an investor is long 200 shares of stock XYZ. However, he will be going on vacation over the next month and will not be able to watch his position. He enters a sell stop order with a stop price of $25. The next day XYZ's price is trading at $25, so the trade is executed at the next best bid price and the investor sells 200 shares of the stock.

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