A stop order (also called a stop-loss order) becomes a market order once the stock reaches a specified price, known as the stop price.
How stop orders work
- Stop sell order: Triggers a market sell order when the stock falls to or below your stop price
- Stop buy order: Triggers a market buy order when the stock rises to or above your stop price
When to use a stop order
Stop orders are commonly used to:
- Limit potential losses on a position you own
- Protect profits by setting a stop below your gains
- Enter a position when a stock breaks through a certain price level
Example
You own shares of XYZ stock, currently trading at $50. You want to limit your downside, so you place a stop sell order at $45.
- If XYZ drops to $45 or below, your stop order triggers
- A market order is sent to sell your shares at the best available price
- Your actual sale price may be slightly above or below $45