Contingency orders are an investment approach often created between brokers and investors. Essentially, the contingency order establishes a specific order for a brokerage to execute on behalf of an investor, when and if certain conditions take place. The contingency order remains in place until the investor chooses to withdraw the order.
Creating an order with a contingency component is not a difficult task. Essentially, the investor will define specific events that must take place before the order is executed. For example, an investor may wish to acquire a thousand shares of a given stock only if the stock in question rises to a given price. Generally, the upward movement will indicate to the investor that the stock will reach that benchmark and go on to achieve a much higher price. By purchasing the shares near the beginning of the upward movement, the investor stands to realize a significant return on the investment.
In like manner, a contingency order can be structured to allow brokerages to sell shares of stock when they slip below a specified price. Again, this can be very helpful for investors who wish to minimize losses on securities that fail to perform up to expectations. Often, the investor can specify a price per share that is slightly above the original purchase price. Should the stock fall back to that price, the brokerage executes an order to sell, preventing the investor from losing any of the original value of the investment. When the provision associated with a contingency order has to do with taking an action when the stock reaches a certain price, this is often referred to as a buy-stop order.
Other examples of a contingency order also are common. The all or none contingency order usually specifies a number of shares to be bought or sold under certain conditions. If the broker is unable to acquire or sell the specified number of shares for some reason, the contingency order is considered null and void. With a fill or kill contingency order, the broker immediately executes the order when the price appears on the trading floor, or the order becomes immediately invalid.