What Is a Stop-Loss Order?

How a Stop-Loss Order Works

A stop-loss order sits inactive in the exchange's order system until the security's price reaches your specified stop price (also called the trigger price). At that moment, the stop-loss converts into a market order and executes at the best available price. For a long position, you set the stop below your entry price — if the stock falls to your stop, the position is sold automatically. For a short position, the stop is set above your entry price to limit losses if the stock rises.

The critical point to understand is the distinction between the stop price and the fill price. When the stop triggers, the resulting market order fills at whatever the market offers next — which may be at, above, or below the stop price. In a fast-moving market or one that gaps overnight, the fill can be significantly worse than the stop price. This is called stop slippage. For example, if a stock closes at $55 and opens the next day at $40 due to bad earnings news, a stop at $50 would trigger on the open gap and fill at $40 — a $10 gap beyond the intended protection level.

A common mistake is placing a stop-loss too tightly — close enough to entry that ordinary intraday price noise triggers it before the trade has a chance to develop. This leads to being stopped out repeatedly on valid setups. The appropriate stop level depends on the security's typical volatility, the time frame of the trade, and the location of meaningful technical levels. Stops placed below clear support levels or at technically logical points are generally more durable than arbitrary percentage-based stops.

Key Points

• A stop-loss order triggers when price reaches the stop level, then converts to a market order — the fill price is not guaranteed and can differ from the stop price.
• Gap risk means the actual fill can be well beyond the stop level if the market opens sharply lower than where it closed.
• Stops placed too tightly are triggered by normal price noise and result in unnecessary losses from premature exits on valid trades.
• A stop-limit order adds a price floor to the execution, but risks no fill at all if the market gaps through the limit price.

Learn More

Stop-loss orders are a foundational risk management tool, but choosing between stop-loss, stop-limit, and trailing stop variants — and placing them at technically sound levels — requires understanding how each type behaves in different market conditions. See Stock Order Types Explained for a complete guide covering all stop order variants with examples.

Related: How Does Short Selling Work? · Trading Glossary

Related Questions

What is the difference between a stop-loss and a stop-limit order?

A stop-loss order becomes a market order when triggered, guaranteeing execution but not price — in fast markets, the fill can be well below your stop price. A stop-limit order becomes a limit order when triggered, meaning your order will only fill at the limit price or better. The tradeoff: stop-limit orders won't fill at all if the price gaps through your limit, leaving you holding a losing position with no exit executed.

Where should I place my stop-loss?

The most technically sound stop placement is just below a level where, if price reaches it, your trade thesis is invalidated — a recent swing low, a key support level, or the bottom of a consolidation range. Avoid placing stops at round numbers where many other traders will have theirs, since market makers know where clustered stops sit. The stop should also be sized so that the resulting loss represents a tolerable percentage of your overall capital — typically 0.5% to 2% of total account value per trade.