Stop order
Family II · Orders
Not to be confused with limit order, stop loss, stop limit order, trailing stop.
Stop order is an order type that remains inactive until the market price reaches a predefined stop price, at which point it is submitted as a market order. The resulting fill price is not guaranteed and may differ from the stop price, especially in fast or illiquid markets. Stop orders are used to enter or exit positions when a certain price level is breached.
How a stop order works
A stop order carries a stop price chosen by the trader. For a sell stop, the order is triggered when the market trades at or below the stop price; for a buy stop, when the market trades at or above it. Once triggered, the order becomes a market order and is executed at the next available price. Slippage can occur, meaning the execution price may be worse than the stop price. Stop orders are not visible in the order book until triggered, unlike limit orders.
Worked example
An investor holds 100 shares of a stock trading at $50 and places a sell stop order with a stop price of $48. The market price falls to $48, triggering the order. It becomes a market order and is filled at the best available price, which might be $47.90 due to a rapid decline.
Variations and risks
Stop orders can be used for both buying and selling. A buy stop is often used to enter a long position on a breakout above resistance, while a sell stop is used to limit losses on a long position or to enter a short position on a breakdown. The main risk is that the execution price may be significantly different from the stop price, particularly in volatile markets or when trading thinly traded securities. Some markets or brokers may restrict the use of stop orders on certain instruments.
Often confused with
- limit order
- A limit order specifies the maximum or minimum price at which you are willing to trade, and it will not execute at a worse price, whereas a stop order becomes a market order and can execute at any price after the stop is triggered; the visible sign is that a limit order has a limit price and a stop order has a stop price.
- stop loss
- A stop-loss is a specific use of a stop order intended to close an existing position to limit losses, while a stop order is a broader order type that can also be used to enter positions; the visible sign is that a stop-loss is always an exit order for an open position.
- stop limit order
- A stop-limit order combines a stop price and a limit price, so after the stop is triggered it becomes a limit order and may not fill if the price moves beyond the limit, whereas a stop order becomes a market order and is filled at the best available price; the visible sign is the presence of both a stop price and a limit price.
- trailing stop
- A trailing stop is a stop order with a stop price that adjusts automatically as the market price moves in a favourable direction, while a regular stop order has a fixed stop price; the visible sign is that the stop price is not static but trails the market.