Stop Order (Stop-Loss Order)
A stop order is an order to buy or sell a security once it reaches a specified price (the stop price), at which point it becomes a market order and executes at the next available price.
Exam Tip
Sell stop = below current price, protects long. Buy stop = above current price, protects short. Stop-limit risks no execution!
What is a Stop Order?
A stop order, also called a stop-loss order, is a conditional order that becomes a market order when a security reaches a specified stop price. It's commonly used to limit losses or protect profits on existing positions.
How Stop Orders Work
| Order Type | Trigger | Becomes |
|---|---|---|
| Stop (Market) Order | Reaches stop price | Market order |
| Stop-Limit Order | Reaches stop price | Limit order |
Stop Order Types
| Type | Use | Example |
|---|---|---|
| Sell Stop | Protect long position from loss | Own stock at $50, sell stop at $45 |
| Buy Stop | Protect short position from loss | Shorted at $50, buy stop at $55 |
Stop vs. Stop-Limit
| Feature | Stop Order | Stop-Limit Order |
|---|---|---|
| Trigger | Becomes market order | Becomes limit order |
| Execution | Guaranteed (at some price) | Not guaranteed |
| Price | May get worse than stop price | Won't execute below limit |
| Gap Risk | Yes - can execute far from stop | No execution if price gaps through |
Example: Sell Stop Order
| Step | Action |
|---|---|
| 1 | You own XYZ at $50 |
| 2 | Place sell stop at $45 |
| 3 | Stock drops to $45 (trigger) |
| 4 | Order becomes market order |
| 5 | Sells at next available price (maybe $44.90) |
Example: Stop-Limit Order
| Step | Action |
|---|---|
| 1 | You own XYZ at $50 |
| 2 | Place sell stop $45, limit $44 |
| 3 | Stock drops to $45 (trigger) |
| 4 | Order becomes limit order at $44 |
| 5 | Only executes at $44 or better |
| 6 | If stock gaps to $43, order may NOT execute |
Common Stop Order Uses
| Strategy | Stop Type | Purpose |
|---|---|---|
| Loss Protection | Sell stop | Limit downside on long position |
| Profit Protection | Trailing stop | Lock in gains as price rises |
| Short Cover | Buy stop | Limit loss on short position |
| Breakout Entry | Buy stop | Enter when price breaks resistance |
Trailing Stop Orders
A trailing stop adjusts automatically as the stock moves in your favor:
| Type | How It Works |
|---|---|
| Dollar Trailing | Stop trails by fixed $ amount |
| Percentage Trailing | Stop trails by percentage |
Example: $50 stock with 10% trailing stop
- Stock rises to $60 → stop moves to $54
- Stock rises to $70 → stop moves to $63
- Stock falls to $63 → order triggers
Key Risks
| Risk | Description |
|---|---|
| Gap Risk | Stock may gap through your stop price |
| Whipsaw | Stop triggered by temporary volatility |
| No Guarantee | Stop-limit may not execute at all |
| Timing | After-hours news can gap prices |
Exam Tips
Stop order = trigger price that converts order to market order. Sell stop goes BELOW current price. Buy stop goes ABOVE current price. Stop-limit adds price protection but risks non-execution.
Study This Term In
Related Terms
Market Order
SecuritiesA market order is an instruction to buy or sell a security immediately at the best available current price, guaranteeing execution but not the price.
Limit Order
SecuritiesA limit order is an instruction to buy or sell a security at a specified price or better, guaranteeing the price but not guaranteeing execution.
Day Trading
SecuritiesDay trading is the practice of buying and selling securities within the same trading day, closing all positions before the market closes to avoid overnight risk and leverage requirements.