As per the SEC definition: A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price. Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short. A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own.
A few points about stop orders:
- The stop price for buy orders is placed above the current market price.
- The stop price for sell orders is placed below the current market price.
- A stop order turns into a market order when the stop is triggered, so the final execution price or time of a stop order is not guaranteed.
- The same risks of market orders apply to stop orders.
- Traders who use technical analysis will place stop orders below major moving averages, trendlines, swing highs, swing lows or other key support or resistance levels.