Quick definition An order that becomes a market order when a specified trigger price is reached. Once triggered, the order executes immediately at the best available price. What it is A stop order rests inactive until the market trades through the specified trigger price. Once triggered, it becomes a market order and executes at whatever price is available. A buy stop sits above the current market and triggers on an uptick. A sell stop sits below the current market and triggers on a downtick. Why it matters Stop orders are the standard tool for risk management. A trader holding a stock at $50.00 can place a sell stop at $48.00. If the price falls to $48.00, the stop order triggers and becomes a market order, locking in losses before further decline. Stop orders do not guarantee a fill at the specified price, only that the order will execute at the market price once triggered. Stop Order versus Stop-Limit Order A stop-limit order becomes a limit order when triggered, not a market order. Once triggered, a stop-limit order will only execute if the price reaches the specified limit. A stop order becomes a market order and will execute immediately at whatever the market offers. Practical example A trader buys 500 shares at $50.00. To limit losses, the trader places a sell stop order at $48.00. If the price falls to $48.00, the stop order triggers and becomes a market order to sell. The order fills at the market price, which might be $47.99 or lower. The trader is guaranteed to exit the position once the trigger is hit, but the fill price is not guaranteed. Gaps and execution risk If a stock opens below the stop price due to news overnight, the stop order triggers at the opening price, not at the stop price. This is a key risk of stop orders. A gap down past the stop price can result in execution at a much worse price than intended. Terminology A sell stop placed below the current price is also called a protective stop. A buy stop placed above the current price is sometimes used to enter a position on a breakout, though this is less common than protective sell stops. See also - Stop-limit order - Trailing stop - Limit order - Market order
