Stop Order

A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. The stop price is not the guaranteed execution price for a stop order. The stop price is a trigger that causes the stop order to become a market order.

A buy stop order is entered at a stop price above the current market price. Buy order limit is generally used to limit loss or to protect a profit on a stock that was sold short. A sell stop order is entered at the stop price below the current market price. Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own. It is also used by traders who trade breakouts where they expect an asset to rally or sink sharply on reaching a particular price level.

Example

Suppose you buy the stock XYZ at $50 per share that you feared might drop in price, you could use a stop order to sell if the price dropped below $45 a share to protect yourself against a larger loss. The risk is that if the price drops very quickly, and other orders have been placed before yours, the stock could actually end up getting sold for less than $45.