Stop Order
IntermediateA stop order is an instruction to buy or sell a security once its price reaches a specified level, called the stop price. When the stop price is reached, the order becomes a market order.
Stop orders are most often used to limit losses, which is why they are commonly called stop-loss orders. An investor who owns a share can set a sell stop below the current price, so that if the price falls to that level, the share is sold automatically.
For example, if you bought a share at 40 and want to limit your loss, you might place a stop order at 36. If the price falls to 36, the order is triggered and becomes a market order to sell at the best available price.
Buy stop orders are also possible. They are placed above the current price and are used, for example, by investors who have sold short and want to limit losses if the price rises.
The main risk is that, once triggered, a stop order executes at the next available price, which may be well below the stop price if the market is moving fast or if the price gaps down overnight. In the example, if bad news causes the share to open at 31, the order would be filled at around 31, not 36.
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