What is a Stop Order?

A stop order is like putting a lure out on a pond but having a robot there to cut the line or reel in the lure if the conditions are not met, such as a fish too small to bother with, to stick with the metaphor, so that the fisher-person (investor) can take a nap or attend to the many other lines he may have in the water.

A stop order names a price which serves as a trigger point, and once the security price has crossed this trigger point, a market order is entered to buy or sell at the next available price. It might be called a buy-stop or sell-stop depending on which action it pertains to.

The problem is that the next available price may not be ideal in some situations, and for this reason sometimes the investor may take it further and name a limit at which the security can be bought or sold, after the actual stop order has been triggered, which would be called a Stop-Limit Order.

So it can get a little confusing.

At the level of a Stop Order, though, it's pretty straightforward. For instance, if I put a Stop on my shares of ABC, if the price falls below the Stop price I've stipulated, the shares are up for grabs and I'll take the next available price for them.

That order can also be called a Stop-Loss Order because it's an attempt to stop the potential losses from getting any bigger.

It is a way to hedge and almost "fence-in" an investor's exposure to market fluctuations which might otherwise catch the investor by surprise and require the investor to manually enter a trade ticket whenever the news of the price change reached him.

It also might be an automated way to lock in potential gains. I could put a stop order at a higher price than I paid for my shares, if I don't believe the security is likely to attain prices much higher than that, to go ahead and agree to sell at what I believe would be a high-water mark in my estimation of things.

These are examples of Conditional Orders and can be entered as multiple orders in the same overarching order.

What is a Stop Limit Order?
What is Stop-Loss Order?