Stop orders

Stop orders, often called stop-loss orders, can feel a little “backward.”

A buy stop tells you to buy only if the price rises. A sell stop tells you to sell only if the price falls.

Why would you buy at higher prices or sell at lower prices? Because stop orders are usually used to limit losses by automatically exiting a position once the market moves against you.

Sell stop orders

Let’s assume the following:

Long 100 shares of ABC stock @ $50

Investor places a sell 100 shares of ABC stock @ $45 stop

Sell stop orders trigger when the market price falls to the stop price or below. When the order triggers (also called being elected), it starts the execution process. In this example, the order triggers (elects) when the market price falls to $45 or below. By placing this order, the investor limits their loss if the stock drops $5 or more. You can think of the stop price as a “floor” the investor is using to cap downside risk.

Long 100 shares of ABC stock @ $50

Investor places a sell 100 shares of ABC stock @ $45 stop

Trading tape: $45.02… $45.01… $44.99… $44.97… $45.01…

Stop orders don’t execute immediately like limit orders. They work in two steps:

Trigger: The order triggers when the market price falls to $45 or below. Here, it triggers at $44.99. Execute: After triggering, the order becomes a market order and fills at the next available price. Here, the next available price is $44.97, so that’s where it executes.

Stop orders always follow this two-step process: trigger first, then become a market order. Because the final order is a market order, nothing is guaranteed:

Execution isn’t guaranteed because the order triggers only if the market reaches the stop price (or beyond). Price isn’t guaranteed because once triggered, it fills at the next available price, which could be above, below, or at the stop price.

Let’s see if you understand sell stop orders.

An investor goes long 100 shares of stock @ $80. They place a sell 100 shares @ $78 stop order.

Trading tape: $79… $80… $78.50… $78… $79… At what price will the order trigger? At what price will the order execute?

(spoiler)

Trigger.= $78

Execute = $79 Sell stop orders trigger when the market price falls to or below the stop price. This order triggers at $78. After the trigger, the order executes at the next available price, which is $79.

Here’s a video that dives further into sell stop orders:

Buy stop orders

Buy stop orders are also “stop-loss” orders, but they’re typically used for short stock positions. If you need a refresher, review shorting a security. Investors with short positions use buy stops to limit losses if the stock price rises. Here’s an example:

Sell short 100 shares of ABC stock @ $80

Investor places a buy 100 shares of ABC stock @ $90 stop

Buy stop orders elect (trigger) when the market price rises to the stop price or above. In this example, the order elects when the market price rises to $90 or above. By placing this order, the investor limits their loss if the short position moves against them by $10 per share or more. You can think of the stop price as a “ceiling” above the investor.

Sell short 100 shares of ABC stock @ $80

Investor places a buy 100 shares of ABC stock @ $90 stop

Trading tape: $89.97… $89.99… $90.02… $90.01… $89.98…

The order triggers when the market price rises to $90 or above, specifically at $90.02. After triggering, the order becomes a market order and fills at the next available price. The next available price is $90.01, where the order executes. Let’s see if you understand buy stop orders.

An investor goes short 100 shares of stock @ $20. They place a buy 100 shares @ $21 stop order.

Trading tape: $20.70… $20.90… $21. 10… $20.50… $20.85… At what price will the order trigger? At what price will the order execute?

(spoiler)

Trigger = $21.10

Execute = $20.50 Buy stop orders trigger when the market price rises to or above the stop price. This order triggers at $21.10. After the trigger, the order executes at the next available price, $20.50.

Here’s a video that dives further into buy stop orders:

Timeframe

Like limit orders, stop orders can be day or GTC orders.

If placed as a day order, the order is canceled if it remains unexecuted by the end of the day. If placed as a GTC order, the order stays open until it’s executed or canceled by the investor.

Key points

Stop orders

Typically utilized to “stop losses” on stock

Do not guarantee price or execution

Trigger (elect) first, then execute

Become market orders after trigger

Day or GTC orders

Sell stop orders

Trigger when the price falls to or below the stop price

Buy stop orders

Trigger when the price rises to or above the stop price