What Is a Stop Market Order?

Updated on December 14, 2022

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Definition

A stop market order is a scheduled order to buy or sell a stock once the price of that stock reaches the predetermined price, known as the stop price. Stop market orders are often used by investors to limit their losses or protect their gains in the event that the market moves in the wrong direction.

Key Takeaways

Stop market orders are orders to buy or sell a stock at a predetermined price, called the stop price.
Once the stop price is reached, a stop market order becomes a market order.
Stop market orders are often used to protect against loss or partake in additional market gains.
Stop market orders become market orders once the stop price is reached, and stop limit orders become limit orders once the stop price is reached.
Investors can manage their risk to their benefit when properly using stop market orders in their portfolio.

How Stop Market Orders Work

Investors can place scheduled orders with predetermined prices that automatically trigger should the price of the stock reach its predetermined value. If you believe a stock may have upward momentum if it reaches a specific price, you can enter a buy stop order to buy at that price and take part in the upward trend of that stock.

If you own a stock and want to avoid a loss, you can enter a sell stop order to trigger if that stock reaches the predetermined price below its current value, limiting your losses.

Example of a Stop Market Order

Sally, the investor, owns shares of ABC Foods, currently priced at $100 per share. She purchased ABC Foods at $85 per share and has made a decent profit already. She believes the stock price has the potential to continue to rise even more, should the price reach $105, and she would like to take part in that momentum. So Sally enters a buy stop order to buy additional shares of ABC Foods at $105 per share.

Sally already has made a decent profit because her original purchase price of ABC Foods was $85 per share. She wants to protect that profit should the stock price drop. To do so, she would need to sell her shares before the price breaks even at $85, preferably at a price where she still makes a profit. Sally also enters a sell stop order at $95 per share, in the event that ABC Foods drops in price. If ABC Foods drops to $95, her sell stop order will become a market order and sell her shares to lock in her profits.

By entering a buy stop order of ABC Foods at $105 per share, Sally is preparing to take part in additional profits as the stock price rises. By entering a sell stop order at $95, Sally is protecting her profit if the stock price drops.

Note

Stop market orders may be executed at prices other than the predetermined stop price in a fast-moving market. Why? Because stop market orders simply trigger the order to become market orders once the stop price is reached, meaning they can be executed at any current market price after the stop price is reached.

Types of Stop Market Orders

There are two kinds of stop orders: buy stop orders and sell stop orders. Both types of orders are scheduled orders that become a market order once the stock reaches the predetermined price.

Buy stop orders: These are orders entered at a price above the current market price. Buy stop orders can be used to partake in additional growth of a stock as it trends upward or to protect against loss should an investor own short positions of the underlying stock.
Sell stop orders: These are orders entered at a price below the current market price. Sell stop orders can be used to protect one's profits or limit losses in a stock they currently own.

Stop orders are also often referred to as “stop loss orders” because they frequently are used to limit the losses in current market positions.

Stop Market Orders vs. Stop Limit Orders

Stop Market Orders	Stop Limit Orders
Becomes a market order when the stop price is reached	Becomes a limit order when the stop price is reached
The buy/sell of the stock is executed at whatever the market price is after the stop price is reached.	The buy/sell of the stock is executed at a specific price or better after the stop price is reached.

What It Means for Individual Investors

With the use of stop market orders, investors can gain an edge to limit their losses or partake in additional gains by setting boundaries on when their orders are bought or sold. Whether you are a day trader or a long-term investor, stop market orders help investors manage their portfolio risk to their benefit.

Frequently Asked Questions (FAQs)

What is a stop market sell order?

A stop market sell order, often referred to as a sell stop order, is an order with a stop price below the current market price. Sell stop orders are often used to protect one's profits or limit losses of long positions.

What is a stop loss order in trading?

A stop loss order is an order to buy or sell a stock at a predetermined price, called the stop price. When the stop price is reached, the order becomes a market order.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

Charles Schwab. “3 Order Types: Market, Limit and Stop Orders.”
Securities and Exchange Commission. “Investor Bulletin: Understanding Order Types.”