Stop Order
Definition
A stop order (also called a stop-market order) becomes a market order and executes immediately at the best available price once the stock touches or crosses your specified stop price — it guarantees execution once triggered but not the fill price, which can differ significantly from the stop price in fast or illiquid markets.
Example
“I had a stop-market order at $24.80 to protect my long entered at $25.50. The stock sold off, hit $24.80, and my stop triggered. Fill came back at $24.68 — $0.12 of slippage — because the market dropped fast through my stop price before the order executed.”
Detailed Explanation
A stop order has two stages: first it watches price, then it activates. Once the stock touches your stop price, the order converts to a market order and executes at whatever the best available price is at that instant. The trigger and the fill can be different — sometimes meaningfully so. In a liquid stock with a penny spread, a stop at $24.80 will likely fill at $24.79 or $24.80. In a thin stock or during a fast gap-down, a stop at $24.80 might fill at $24.40 because the stock blew through multiple levels before your market order could execute. This "stop slippage" is the defining risk of stop-market orders.
Stop orders are primarily used as protective exits: you're long a stock and you set a stop below to automatically exit if the trade goes against you beyond a defined threshold. The purpose is capital preservation and systematic discipline — the stop enforces your risk management even if you're away from the screen or if your emotional resistance to taking a loss might otherwise cause you to hold past your plan. Using hard stop orders rather than mental stops removes the human element from the worst-possible-moment decision (when you're wrong and the market is moving against you).
Buy-stop orders are the mirror image of protective sell stops and are used to enter long positions on breakouts — you set a buy-stop above a resistance level, and if the stock breaks out to that price, your order triggers and buys the breakout automatically. This lets you define your breakout entry in advance and have it execute automatically rather than requiring you to watch the chart at the exact moment of the break. The risk is the same: in a fast-moving breakout, you might fill significantly above your intended entry if the stock gaps through your trigger price.