What is a stop order, and how is it used?

A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price (the "stop price"). If the stock reaches the stop price, the order becomes a live market order and is typically filled at the next available market price. If the stock fails to reach the stop price the order isn't executed

A stop order may be appropriate in various scenarios

• When a stock you already own has risen and you want to attempt to protect part of your unrealized gain should it begin to fall

• When you recently bought a stock and want to set a floor around the level of loss you'd be willing to tolerate on the position

• When you want to buy a stock should it break above a certain level because you think that could signal the start of a continued rise

A sell stop order is sometimes referred to as a "stop-loss" order because it can be used to help protect an unrealized gain or seek to minimize a loss. A sell stop order is entered at a stop price below the current market price. If the stock drops to the stop price (or trades below it), the stop order to sell is triggered and becomes a market order to be executed at the market's current price. A sell stop order is not guaranteed to execute near your stop price. A stop order may also be used to buy. A buy stop order is entered at a stop price above the current market price (in essence, "stopping" the stock from getting away from you as it rises)

Let's revisit our previous example but look at the potential impacts of using a stop order to buy and a stop order to sell with the stop prices the same as the limit prices previously used

While the two graphs may look similar, note that the position of the red and green lines is reversed: The stop order to sell would trigger when the stock price hit $144 (or less) and would be executed as a market order at the current price. So, if the stock were to fall further after hitting the stop price, it's possible that the order could be executed at a price that's lower than the stop price