Skip to main content

Investor Bulletin: Stop, Stop-Limit, and Trailing Stop Orders

July 13, 2017

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about the difference between using “stop” and “stop limit” orders to buy and sell stocks. 

Stop, stop-limit, and trailing stop orders may not be available through all brokerage firms.  Investors should contact their firm to determine which orders are available for buying and selling stocks, and their firms’ specific policies regarding these types of orders.  

Stop Order

A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price.  When the stop price is reached, a stop order becomes a market order.  A buy stop order is entered at a stop price above the current market price.  Investors generally use a buy stop order in an attempt to limit a loss or to protect a profit on a stock that they have sold short.  A sell stop order is entered at a stop price below the current market price.  Investors generally use a sell stop order in an attempt to limit a loss or to protect a profit on a stock that they own. 

Before using a stop order, investors should consider the following:

  • The stop price is not the guaranteed execution price for a stop order.  The stop price is a trigger that causes the stop order to become a market order.  The execution price an investor receives for this market order can deviate significantly from the stop price in a fast-moving market where prices change rapidly.  An investor can avoid the risk of a stop order executing at an unexpected price by placing a stop-limit order.  A stop-limit order includes a limit price that requires the order to be executed at the limit price or better – but the limit price may prevent the order from being executed.
  • A stop order may be triggered by a short-term, intraday price move that results in an execution price for the stop order that is substantially worse than the stock’s closing price for the day.  Investors should carefully consider the risk of such short-term price fluctuations in deciding whether to use a stop order and in selecting the stop price for an order.
  • Different brokerage firms have different standards for determining whether a stop price has been reached.  Some brokerage firms use only last-sale prices to trigger a stop order, while others use quotation prices.  Investors should check with their brokerage firms to determine which standard would be used for stop orders.

Stop-Limit Order

A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order.  Once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better).  The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.

Before using a stop-limit order, investors should consider the following:

  • As with all limit orders, a stop-limit order may not be executed if the stock’s price moves away from the specified limit price, which may occur in a fast-moving market.
  • The stop price and the limit price for a stop-limit order do not have to be the same price.  For example, a sell stop limit order with a stop price of $3.00 may have a limit price of $2.50.  Such an order would become an active limit order if market prices reach $3.00, however the order can only be executed at a price of $2.50 or better.
  • As with a stop order, a stop-limit order may be triggered by a short-term, intraday price move that results in an execution price for the stop order that is substantially inferior to the stock’s closing price for the day.  Investors should carefully consider the risk of such short-term price fluctuations in deciding whether to use a stop order and in selecting the stop price for an order.
  • As with stop orders, different brokerage firms may have different standards for determining whether the stop price of a stop-limit order has been reached.  Some brokerage firms use only last-sale prices to trigger a stop-limit order, while others use quotation prices.  Investors should check with their brokerage firms to determine which standard would be used for stop-limit orders.

Trailing Stop Order

A trailing stop order is a stop or stop limit order in which the stop price is not a specific price.  Instead, the stop price is either a defined percentage or dollar amount, above or below the current market price of the security (“trailing stop price”).  As the price of the security moves in a favorable direction the trailing stop price adjusts or “trails” the market price of the security by the specified amount.  However, if the security’s price moves in an unfavorable direction the trailing stop price remains fixed, and the order will be triggered if the security’s price reaches the trailing stop price.

Example of a sell trailing stop order:

Stop order image

1. You buy XYZ stock at $20 per share. 
2. XYZ rises to $22. 
3. You place a sell trailing stop order with a trailing stop price of $1 below the market price. 
4. As long as the price moves in your favor (i.e., increases, because here you are looking to sell it), your trailing stop price will stay $1 below the market price. 
5. The price of XYZ peaks at $24 then starts to drop (not in your favor).  Your trailing stop price will remain at $23. 
6. Shares are sold when XYZ reaches $23, though the execution price may deviate from $23.

Before using a trailing stop order, investors should consider the following:

  • Investors should carefully select the trailing stop price they use for a trailing stop order since short-term market fluctuations in a stock’s price can activate a trailing stop order.
  • As with stop and stop-limit orders, different trading venues may have different standards for determining whether the stop price of a trailing stop order has been reached.  Some exchanges use only last-sale prices to trigger a trailing stop order, while other venues use quotation prices.  Investors should check with their brokerage firms to determine which standard would be used for their trailing stop orders.
RELATED INFORMATION

For additional educational information for investors, see the SEC’s Investor.gov website

For additional information relating to other types of orders investors may use to buy or sell stock, please read our investor bulletin “Trading Basics: Understanding Order Types.”

The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions conce