What Is a Stop Order?
A stop order is an instruction that stays inactive until a stock reaches a specified stop price. Once the stop price is reached, the stop order becomes a market order.
A stop order is commonly called a stop-loss order, although stop orders can also be used to enter trades rather than only exit them.
Sell Stop Order Example
You own 100 shares of a stock trading at $50. You place a sell stop order at $45.
Possible sequence: the stock trades above $45 and the order stays inactive; the stock reaches the $45 stop price; the stop order activates and becomes a market sell order; the shares sell at the best available prices.
The final execution could be $45, but it could also be $44.90, $43.50, or another available price. The stop price is a trigger, not a guaranteed sale price.
Buy Stop Order Example
A stock trades at $50, and you believe a move above $55 could confirm a breakout. You place a buy stop order at $55.
If the stock reaches the broker's applicable trigger condition at $55, the order becomes a market buy order. Buy stop orders are placed above the current market price; sell stop orders are generally placed below it.
Advantages and Risks of Stop Orders
Advantages
- Can automate a planned exit
- Can help reduce emotional decision-making
- Can protect part of an unrealized gain
- Can be used to enter a breakout
- Has a greater chance of executing than a stop-limit order after activation
Risks
- The stop price does not guarantee the execution price
- A temporary price swing can trigger the order
- Volatile markets can cause substantial slippage
- An overnight gap can produce an execution far below the stop price
- Different brokers may use different trigger methods
- A stock may rebound after triggering the order
Stop orders can execute at undesirable prices during volatile conditions, even when the stock later stabilizes during the same trading session.
Can a Stop Order Be Triggered Without a Trade at the Exact Stop Price?
Possibly. Brokerage firms may use different activation standards. Depending on the broker and security, a stop may be triggered by a completed transaction, a bid or ask quotation, or another specified market event.
Traders should review their broker's order-entry disclosures rather than assuming every platform uses the same trigger.
Stop Order FAQs
What happens when a stop order is triggered?
It becomes a market order and attempts to execute at the best available price. The final price can be higher or lower than the stop price.
Is a stop order the same as a stop-loss order?
The terms are frequently used interchangeably when the order is intended to limit a loss. However, stop orders can also protect profits or trigger new positions, such as a buy stop used to enter a breakout.
Can a stop-loss sell below my stop price?
Yes. The stop price triggers a market order. If the stock moves rapidly or gaps lower, the final execution can be substantially below the stop price.
Can a stop order be triggered without a trade at the exact stop price?
Possibly. Brokerage firms may use different activation standards — a completed transaction, a bid or ask quotation, or another specified market event, depending on the broker and security.
Related Order Types
- Stop-limit orders — add a price boundary to a stop trigger.
- Market orders — what a stop order becomes once triggered.
- Limit orders — control the exact price, at the cost of a guaranteed fill.
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