What are stop orders?

Stop orders let you plan ahead to buy or sell a security if it rises or falls to a certain price.They may be useful when trying to take advantage of potential gains or limit possible losses.

What's a stop order?

A stop order is an order to sell or buy a stock or fund after it reaches a specific price you’ve set (called the stop price). Once the security hits your stop price, a market order is triggered to place your order at the current price. If the stock or fund doesn’t reach your stop price, the order is never executed.

When you buy with a stop order, you choose a stop price greater than the current market price. The order is executed if the price of the security rises to your stop price.

When you sell with a stop order, you choose a stop price less than the current market price. The order is executed if the price of the security falls to your stop price.

Stop-loss orders (sell stop orders)

Sell stop orders are also referred to as stop-loss orders because they may be used in an effort to prevent losses. They are one of the more common uses of stop orders.

Examples of how you might use stop orders

Sell: Let’s say you originally bought a stock for $50, but now it’s trading at $100. You’re hoping the price will go even higher, but you also don’t want to risk losing potential gains. You could place a stop order to sell if the price drops to $90 to “lock in” some profits.

Buy: Maybe there’s a stock you’ve been monitoring that you think is about to pop. It’s been holding steady at around $10, but if it starts going up you don’t want to miss out. You could place a stop order to buy for $11 hoping to get in on possible future growth.

Stop orders vs limit orders

Stop orders may seem like the reverse of limit orders (buying a security if it drops to a certain price, selling if it climbs to one), but there is a very important difference. With limit orders you’re putting in a bid to buy or sell at the price you’ve selected, and the order is executed at that price if it becomes available.

With stop orders, when your stop price is reached a market order is triggered—so you may end up buying or selling for more or less than your stop price.

Example: Let’s say in the “buy” scenario above the stock price was $10.75 when the market closed for the day. If it opened the next morning at $11.50, your stop order would take effect because the stop price of $11 was reached. A market order would then be executed at the next available price and you’d likely pay around $11.50 instead of $11.

Incorporating stop orders into your trading plan

Stop orders can be a valuable tool for helping manage risk by automating your trade execution. They may help reduce time spent monitoring when you’re looking to protect profits or limit potential losses, and can be key components of your entry and exit strategies.

Next steps to consider

Visit the Plynk app’s Discover page to browse stocks and funds that may interest you.

Make a deposit or set up recurring deposits to your brokerage account so you’re ready to go when you want to make a trade!