Stop And Stop-Limit Orders
A stop order is invisible until the market touches a trigger price, then it fires as a market or limit order — and the difference between those two versions decides whether you get out at a bad price or don't get out at all.
Prerequisites: Order Book Mechanics
A resting limit order is visible in the book the instant it's placed. A stop order is not — the exchange holds it privately, watching the tape, and only releases it once the market trades at or through a chosen trigger price. Until then, nobody, including you looking at the book, sees anything.
Stop (stop-market). When the trigger is hit, the order converts into a plain market order and sweeps the book for whatever price it can get. Guaranteed to execute (once triggered), not guaranteed on price.
Stop-limit. When triggered, it converts into a limit order at a specified price instead of a market order. Guaranteed on price (or better), not guaranteed to execute at all.
A worked example
A trader is long a stock trading at 50.00 and wants downside protection, so places a stop-market at 48.00: "if the last trade touches 48.00, sell at whatever price is available." News breaks overnight; the stock gaps down and opens at 44.50 with no trades in between. The stop triggers on the first print at or below 48.00 — which is 44.50, not 48.00 — and becomes a market sell that fills somewhere around there. The trader is out, but 3.50 worse than the number on the order ticket.
Now suppose instead the trader had placed a stop-limit at 48.00, limit 47.80: "if the price touches 48.00, submit a limit sell at 47.80 or better." On the same gap to 44.50, the stop triggers, but the resulting limit order at 47.80 finds no buyers anywhere near that price — it just rests on the book, unfilled, while the stock keeps falling. The trader wanted protection and got none.
Stop-market trades a guaranteed exit for an unknown price; stop-limit trades a known worst price for the risk of no exit at all. Neither removes risk — each just relocates it.
Stops cluster at round numbers and recent lows, and everyone can guess roughly where they sit. When price approaches a well-known stop level, it can trigger a cascade of stop-market sells hitting the market at once, each pushing price further into the next batch of stops — the mechanism behind many "flash" moves. Placing a stop exactly at an obvious level, and sizing it as if it will fill at that level, is the classic beginner mistake.
Stops are triggers, not standing liquidity — they don't appear in the book, don't affect the visible depth, and can't be inferred by watching quotes, only by watching for the trigger event itself in the tape.
Related concepts
Practice in interviews
Further reading
- Harris, Trading and Exchanges (ch. 4)