A stop order (stop-loss order) is an order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.

A sell stop order is an instruction to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price. For example, if an investor holds a stock currently valued at $50 and is worried that the value may drop, he/she can place a sell stop order at $40. If the share price drops to $40, the broker will sell the stock at the next available price. This can limit the investor's losses (if the stop price is at or below the purchase price) or lock in some of the investor's profits.

A buy stop order is typically used to limit a loss (or to protect an existing profit) on a short sale. A buy stop price is always above the current market price. For example, if an investor sells a stock short hoping the stock price goes down in order to give the borrowed shares back at a lower price (Covering), the investor may use a buy stop order to protect himself against losses if the price goes too high.

A stop-limit order combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or to sell) at no more (or less) than a specified price.

Stop orders are not always executed at the stop price. If the stock drops drops very suddenly by a large amount, the stop order may be triggered and the stock sold. However, since the stock is always sold at market price, the price may be below the stop price. Stop orders are entered into a computer trading system and are automatically executed whenever the price is at or below the stop price.

If there are a lot of stop orders that are triggered by a specific stop the price of the stock can plummet very quickly. Fortunately, this is fairly rare. A stop order is very frequently used by active investors as they allow a quick and automatic response to stock price movements. Buy and hold type investors are unlikely to use this type of investment strategy.