Stop Order

A stop order is an instruction to buy or sell a stock once it trades at a specific price, called the stop price. Until that price is touched, the order does nothing — it sits inactive with your broker. The moment a trade occurs at or through the stop price, the order "triggers" and turns into a market order, meaning it will now execute immediately at whatever price is available.

There are two flavors. A sell stop is placed below the current market price and is commonly used to limit a loss on a position you already own, or to exit if a stock breaks down. A buy stop is placed above the current market price and is often used to enter a breakout trade or to cover a short position if the price rises against you.

The nuance that catches people out is what happens after the trigger. Because a triggered stop order becomes a market order, not a limit order, you are guaranteed to get filled but not guaranteed the price you see when it triggers. In a fast-moving or thin market, the stock can gap or slip several cents or even dollars past your stop before your order actually fills — this is called slippage. A stop order protects you from staying in a bad trade, but it does not protect you from a bad fill price.

People also confuse stop orders with stop-limit orders. A plain stop order fills at whatever the market offers once triggered; a stop-limit order triggers the same way but then only fills at your specified limit price or better, which means it can protect the price but may not fill at all if the market runs past your limit.