Glossary
Stop Order
A dormant instruction that becomes a live order only if the price crosses a level set in advance.
A market order and a limit order both go to work immediately. A stop order does neither. It sits inactive until the stock trades through the trigger price, and at that moment it turns into an ordinary order and behaves like one from then on.
That last step is the part people underestimate. Once triggered, a plain stop becomes a market order, so it fills at whatever is available next, which in a fast move can be well past the level that set it off. A stop-limit order adds a floor on the fill price, and the trade-off is that it may not fill at all.
They are commonly used to automate an exit so that a decision does not have to be made in the moment. What they are not is a guarantee about the price received, and a gap between one day's close and the next day's open passes straight through the trigger level without pausing at it.
Learn this properly
Lesson 3: How Buying a Stock Actually WorksBrokerage accounts, what happens in the seconds after you press the button, and order types explained without the jargon.
Related terms
- Market OrderAn instruction to trade immediately at whatever price is currently available, rather than at a price you name.
- Limit OrderAn instruction to trade only at a stated price or better, which may go unfilled if that price is never reached.
- VolatilityHow much a price moves around over a period, in either direction, measured as the size of the swings rather than the destination.
- LiquidityHow easily something can be turned into cash near its quoted price, without the act of transacting moving that price.
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