What is a stop order in stocks?

A stop order, also called a stop-loss order, is an instruction to buy or sell a stock once its price reaches a level you set in advance, the stop price. Until then it does nothing. When the stop price is reached, the order becomes a market order and is filled at the best price available at that moment.

That last step is the part people miss. The SEC’s investor bulletin says it directly: the stop price is not the execution price; it is a trigger, and the price you receive can deviate significantly from it, depending on the liquidity available when the market order executes. In a calm market the two are usually close. In a fast one they are not; that difference is slippage.

Hypothetical: you own 100 shares bought at $50.00 and place a sell stop at $48.00, planning to lose no more than $2.00 a share, or $200. If the stock drifts down and trades at $48.00, the stop triggers and might sell at $47.97, a $203 loss. The order did its job. What happens when the price does not drift is covered in the gap example below.

Stop order (stop-loss order)
An order to buy or sell once the price reaches the stop price. When triggered it becomes a market order and fills at the next available price.
Stop price
The trigger level of a stop or stop-limit order. It activates the order; it does not set the fill price.

What is a stop-limit order?

A stop-limit order combines a stop order with a limit order and carries two prices. The stop price is the trigger, as before. The limit price is the worst price you will accept. Once the stop price is reached, the order becomes a limit order that can execute only at the limit price or better. The drawing at the top of the page shows the two paths side by side.

The two prices do not have to match. A sell stop-limit might have a stop at $48.00 and a limit at $47.50: it becomes active when the stock reaches $48.00 and then sells only at $47.50 or higher. The 50 cents between them is room for the order to fill in a quick move. Set them equal, and the order fills only if a buyer is still there at the stop price itself.

The benefit is control over the price. The cost, in the SEC’s words, is that the order may not be executed if the stock’s price moves away from the limit. You would then still own a falling stock, with an order that looks active but is not doing anything.

Stop-limit order
An order that becomes a limit order once the stop price is reached. It fills only at the limit price or better, so it may not fill at all.
Limit price
The worst price a limit or stop-limit order will accept: the lowest price for a sell, the highest for a buy.

Buy stop vs sell stop: which side of the price does each sit on?

A sell stop is placed below the current price. Traders use it to limit a loss or protect a gain on shares they own: if the price falls to the stop, the order sells. A buy stop is placed above the current price. It limits the loss on a short sale, or enters a long position if the price breaks above a level.

This is the opposite side from limit orders. A buy limit waits below the price for a better deal; a buy stop waits above it and buys only if the price rises to it. Stops sit on the worse side of the market on purpose: they are for the case where the price moves against you, or breaks out while you are still waiting.

Hypothetical, with the stock at $50.00, as in the drawing below: a sell stop at $48.00 could carry a limit at $47.50, selling only down to that price. A buy stop at $52.00 could carry a limit at $52.50, buying only up to that price. For a sell, the limit goes at or below the stop; for a buy, at or above it.

Sell stop
A stop order placed below the current price. It sells if the price falls to the stop, to limit a loss or protect a gain on shares you own.
Buy stop
A stop order placed above the current price. It buys if the price rises to the stop, to cover a short position or to enter on a breakout.

Turn your phone sideways to read the image. Tap to close.

A price ladder with price now at $50.00. Above it, a dashed green line at $52.00 labeled buy stop, with a shaded band up to $52.50 labeled limit; below it, a dashed red line at $48.00 labeled sell stop, with a shaded band down to $47.50 labeled limit. Two cards: buy stop at $52.00, above the price, covers a short or buys a breakout, and as a stop-limit buys only up to $52.50; sell stop at $48.00, below the price, protects shares you own, and as a stop-limit sells only down to $47.50. A note reads: stops wait on the worse side of the price, buy above, sell below.

Stop order vs stop-limit order: what is the difference?

Both orders wait for the same trigger. They differ in what they become once it fires, and so in which risk you keep. In an orderly market there is little to choose between them; the difference shows when the price jumps, in a fast drop, at the open after news or in a thinly traded stock. Side by side:

  • What it becomes: a stop order becomes a market order; a stop-limit order becomes a limit order.
  • Is the fill certain? A stop order will almost always fill once triggered, as long as there are buyers and sellers. A stop-limit order fills only if the market trades at the limit or better.
  • Is the price certain? A stop order takes the next available price, whatever it is. A stop-limit order never fills beyond its limit.
  • The risk you keep: with a stop order, a bad fill in a fast market or a gap. With a stop-limit order, no fill at all, and a position that is still open.
  • In an orderly market: little difference. If the stock slides through $48.00 a few cents at a time, both orders sell close to $48.00.

What happens in a gap down? A worked example

Hypothetical, continuing the example: you own 100 shares bought at $50.00, with the exit set at $48.00 for a planned loss of $200. The stock closes at $49.00. After the close the company reports bad news, and the next morning the stock opens at $45.00. No trades took place between $49.00 and $45.00, so there was never a chance to sell at $48.00.

With a stop order: the first trade at $45.00 is below the stop, so the order triggers at the open and becomes a market order. It sells near $45.00. The loss is ($50.00 − $45.00) × 100 = $500, two and a half times the $200 you planned, but you are out.

With a stop-limit order, stop $48.00 and limit $47.50: the order also triggers at the open, but it is now a limit order to sell at $47.50 or better, and the market is at $45.00. It does not fill. If the stock keeps falling to $42.00, you still hold 100 shares and the open loss is ($50.00 − $42.00) × 100 = $800, four times the plan. If the stock had bounced back above $47.50 instead, the order would have filled there, for a loss of $250 or less. The stop-limit turned a certain bad exit into a bet on a rebound.

Neither result is the order malfunctioning. Each did exactly what it is designed to do. The lesson is to size the position for the gap, not for the stop: a stop caps the loss only when the market trades through it.

Turn your phone sideways to read the image. Tap to close.

Daily candles that close at $49.00, then gap down to open at $45.00 and fall to $42.00, with the note bad news overnight. A dashed red line marks the stop at $48.00 and a dotted line the limit at $47.50; no candle trades between them. Two cards: stop order, sold near $45.00, loss −$500, planned loss −$200; stop-limit order, not filled: still holding, open loss at $42.00 −$800, planned loss −$200. A note reads hypothetical: 100 shares bought at $50, stop at $48, limit at $47.50.

Which order fits which situation?

There is no better order in general, only a better match to what you fear more: a bad price, or no exit. A few common cases are listed below.

Where the stop price itself belongs, beyond the level that proves the trade idea wrong, is a separate question, covered in stop loss and take profit.

  • Protecting a position when getting out matters most: a stop order. You accept slippage in exchange for the exit. This is the usual choice for a stop loss in a liquid stock during regular hours.
  • Thin or volatile stocks, where a brief spike could sell you at a price far from the market: a stop-limit order with room between the stop and the limit, or a smaller position and no resting order at all.
  • Entering a breakout: a buy stop-limit often fits well. If the price jumps past your limit, the order does not fill, and a missed entry costs nothing, unlike a missed exit. See the breakout trading strategy.
  • Covering a short: a buy stop above the price. A short has no upper limit on its loss, so the certainty of the fill usually matters more here.
  • Holding through earnings or overnight news: neither order protects you from a gap. Reduce the size, or accept the gap risk knowingly; the gap trading strategy guide explains why.
  • Letting a winner run: a trailing stop is a stop, or stop-limit, whose price follows the market. See trailing stop loss.

How far should the limit be from the stop, and what are the common mistakes?

The distance between the stop and the limit decides how the order behaves. A limit equal to the stop gives the tightest price and the highest chance of no fill. A limit far below the stop fills in almost any ordinary drop and begins to behave like a plain stop order. Many traders set the distance from the stock’s normal movement, for example a fraction of its average true range, rather than from a round number. There is no correct figure; it is a trade-off you choose. The mistakes that come up most:

  • A limit too tight. With the stop at $48.00 and the limit at $48.00 or $47.98, a quick drop to $47.90 triggers the order and leaves it unfilled.
  • The wrong side. A sell stop entered above the current price, or a buy stop below it, is already past its trigger: depending on the broker, it may be rejected or may trigger at once. For a sell stop-limit, a limit above the stop is likely to sit unfilled after triggering.
  • Treating the stop price as the exit price. Size the trade knowing the fill can be worse, and far worse through a gap.
  • Placing the stop where noise will hit it. The SEC warns that a short-term price swing can trigger a stop order, and the sale stands even if the price recovers the same day.
  • Forgetting the order’s lifetime. A day order expires at the close; a good-til-canceled order can sit for weeks and trigger on news you never planned for.
  • Assuming the order works outside regular hours. Whether a stop can trigger in pre-market or after-hours trading depends on the broker and on how the order was entered, so check.
  • Not checking after a trigger. A stop-limit that triggered and did not fill is still a live limit order, and still your open position.

What depends on your broker and the exchange?

Everything above describes how these orders work in general. The details are set by your brokerage firm and by the trading venue, and the SEC’s bulletins tell investors to check them with their firm. In particular:

  • Availability. Stop, stop-limit and trailing stop orders may not be offered by every brokerage firm.
  • What counts as reaching the stop price. Some firms and venues trigger on the last sale; others use quoted prices. On a thin stock with a wide spread, that changes when the order fires.
  • Which sessions the order is active in, and how long it stays open before it expires.
  • How the risks are explained. FINRA’s guidance asks brokerage firms to explain the risks of stop orders to their customers, especially for volatile markets; read that page before you place the first one.
  • Other products. Options, futures, forex and crypto platforms use the same names with their own rules; read the order ticket and the help pages before relying on one.