A stop order is an order to buy or sell a stock when the stock price reaches a specified price, which is known as a stop price. When the specified price is reached, the stop order becomes a market order.
- (a) A Sell Stop Order is used by investors and traders long a stock to protect an existing profit or avoid further losses if the stock price drops. A stop order to sell must be placed below the current market price.
- (b) A Buy Stop Order is used by investors and traders short a stock to protect a profit or limit a loss if the stock price increases. A stop order to buy must be entered at a price above the current market price.
Stop orders may be placed as "Day" orders which are good for the day only, or as "GTC" orders, which are good until canceled.
For example, if you own 100 shares of IBM at $100/share and you want to sell it if the stocks goes up to $110, that would be a limit sell order; but, if you wanted to sell if the stock price drops to $95 so as to limit your losses, that would be a stop sell order.