A stop loss order is an instruction to sell a stock if it falls to a price you choose. It helps limit a loss without watching the screen all day.
Stop market order
When the stop price is reached, it becomes a market order and sells at the next available price. It is likely to fill, but the price can be worse than your stop in a fast market.
Stop limit order
When the stop price is hit, it becomes a limit order at the price you set. You control the lowest price you accept, but if the price drops past your limit, the order may not fill at all.
Trailing stop
A trailing stop moves up as the price rises, keeping a set distance below the highest price, and does not move back down.
Limits to know
- Prices can gap overnight and open below your stop.
- Thinly traded stocks can slip a lot.
- A stop set too tight can sell you out on normal swings.
Choose the level with a reason
Place a stop where your idea is proven wrong, not at a random percentage, then size your position from it.
How a stop works
A stop loss order turns into a market order when the price falls to your stop price. If you buy at $20 and set a stop at $18, the order triggers if the stock trades at $18 or lower. It limits your loss without watching the screen.
The catch
The stop is not a guarantee. In a fast drop or after a gap down overnight, your order may fill well below the stop. A stop limit order sets a minimum price, but may not fill at all. Stops can also trigger on a brief dip and then the stock rebounds.
Where to place it
Pick a level that shows your idea is wrong, not just a random percent. Then size your position so that loss equals your limit using the position size calculator. See position sizing.
Thin stocks
In small stocks with wide spreads, stops can fill poorly. Plan for that.
Frequently asked questions
Should I always use a stop?
Many traders do. Long-term investors may use a different plan, such as position limits.
Keep learning about stop loss
Reading is a start, practice makes it stick. Run the numbers in our investor tools, test yourself in Stock Jeopardy, or follow the start here guides to see what to read next after stop loss.
Further reading: Investor.gov from the U.S. SEC and the Canadian Securities Administrators investor education site offer free, independent guides for new investors.
A worked example with real numbers
Say you buy 50 shares of a stock at $40, a $2,000 position. You decide the idea is wrong if the price falls to $36, so you place a stop loss order at $36. If the stock slides to $36 during the day, your order triggers. With a stop market order, it sells at the next available price, which might be $36.00, or $35.90, or a little lower. Your loss is roughly $200, or 10%, plus a small amount of slippage.
Now picture bad news after the close. The stock opens the next morning at $33. Your stop at $36 triggers at the open, and the sale happens near $33, not $36. The loss is about $350 instead of $200. This is a gap. A stop is not a guarantee of price. It is a trigger that starts a sale.
Stop limit orders in the same gap
Now suppose you used a stop limit order with a stop at $36 and a limit at $35.50. When the stock opens at $33, your order becomes a limit order to sell at $35.50 or better. No one is buying at that price, so it does not fill. You still own the shares and the stock may keep falling. That is the trade-off. The limit protects you from a bad price but may leave you in the position. Neither type is better. Each one handles a different risk.
Sizing the position around the stop
A stop becomes more useful when it is tied to how much you are willing to lose. If you decide you can accept a $100 loss on one idea and the stop is $4 below your entry, you would hold about 25 shares ($100 divided by $4). If the stop is $2 below, you could hold about 50. Setting the amount at risk first, then working out the share count, keeps one bad trade from doing outsized harm. You can track the result of a trade afterward with the stock profit loss calculator.
Where stops often fail people
A stop placed too close can be triggered by normal daily movement. A stock that routinely moves 3% in a day will hit a 2% stop quickly, and then may bounce back without you. A stop placed at a round number can also be crowded, since many others place stops there too. And stops generally do not work when markets are closed, or when trading in the stock is halted.
- Check how much the stock usually moves in a day before choosing a distance.
- Remember that most stops trigger only in regular trading hours unless your broker says otherwise.
- Cancel the stop if you sell the shares another way, so you do not open an unwanted position.
Do you need a stop at all?
Some long-term investors do not use stops. They prefer to review a company on a schedule and decide based on its business, not its short-term price. Others like the discipline. Both approaches can be reasonable. What matters is that you decide in advance and follow the plan. Our guide to building a stock portfolio covers how position sizes and review dates fit together, and the glossary defines terms like slippage and gap.
What to do next
Take a stock you follow and look at its price chart for the past three months. Write down its typical daily move and its largest single-day drop. Then ask where a stop would have been triggered by ordinary noise, and where it would have saved real money. No real money is needed for this. It simply helps you see how stops behave before you rely on one.
Education only, not investment advice.
