Trading term

What is Stop order?

A stop order sits dormant until the price reaches a level you choose. It then turns into a market order and fills at whatever price is available right then. The stop price is a trigger, not a promise — it decides when you trade, not what you get.

A stop order rests with your broker or the exchange, invisible to everyone else, doing nothing at all until price touches the level you set. A sell stop goes below the current price, so it fires if a stock you own starts falling. A buy stop goes above it, so it fires if a price you've been waiting on breaks higher. That's also how a short seller caps a losing trade. The moment price reaches your stop, the order wakes up as a plain market order and takes the best price on offer. The SEC's investor bulletin on stop orders makes the same point. Reaching your stop converts the order into a market order, and nothing about it is a guaranteed price.

In a calm market on a heavily traded stock, that's a distinction without much difference. The spread is a cent wide, plenty of buyers are sitting there, and you fill within a whisker of your stop. The gap between trigger and fill opens up when the market stops being calm. If price is sliding fast, or the stock is thin, or bad news broke overnight and it reopens far below where it closed, the market order still fills. That's what market orders do. But it fills at whatever is left, which can be a long way from the number you typed.

Two more things are worth knowing. Brokers don't all agree on what counts as reaching the stop. Some watch last-sale prices and others watch quotes, so the same stop can fire at slightly different moments at two firms. And because a stop can be tripped by a brief dip and then sold into an empty book, some exchanges have dropped the order type from their rule books entirely. If you'd rather control the price than guarantee the exit, a stop-limit order swaps one risk for the other.