Stop loss order
Also written Stop order · Stop loss limit order · Stop loss market order
An order that stays out of the market until the price reaches a trigger price, then enters as a limit or market order - used to cap the loss on an open position.
In plain language
A stop loss order is an instruction to act only if the market turns against you. Until the price reaches a level you set - the trigger price - the order does not enter the market at all. Nobody can see it or trade against it.
Once the trigger is hit, the order is released. It then behaves like an ordinary order: either a limit order at a price you also specified, or a market order that takes the best price available.
A buyer who fears a fall uses a sell stop loss below the current price. A short seller who fears a rise uses a buy stop loss above it.
How it works
From Chapter 3 (section 3.2.2.1, under price conditions, "Stop Orders"):
- The order gets activated only when the market price of the security reaches or crosses a threshold price; until then it does not enter the market.
- The client enters two prices: a trigger price and a limit/market price.
- A buy order in the stop loss book is triggered when the last traded price in the normal market reaches or exceeds the trigger price. A sell stop loss is triggered when the price drops to the trigger or below.
| Sell stop loss | Buy stop loss | |
|---|---|---|
| Protects | a long (bought) position | a short (sold) position |
| Trigger | below the purchase price | above the selling price |
| Limit price (if a limit order) | equal to or less than the trigger | equal to or more than the trigger |
Once triggered:
- a stop loss limit order is placed at the limit price and matches only if a counter order exists at that price or better;
- a stop loss market order matches with the best counter order available.
The workbook's intraday example: a trader buys at Rs 100 and does not want to lose more than Rs 5 per share, so places a stop loss sell with trigger Rs 96 and limit Rs 95.
A worked example
This is the workbook's sell-side example, with the loss worked out.
Nisha bought 400 shares of ABC Industries at Rs 830. She places a sell stop loss with a trigger of Rs 800 and a limit of Rs 790.
| Price path | What happens |
|---|---|
| ABC trades at Rs 812 | Nothing. The order is not in the market. |
| ABC trades at Rs 800 | Triggered. A limit sell for 400 shares at Rs 790 enters the market. |
| Buyers exist at Rs 790 or better | The order fills. If all 400 fill at Rs 790, the loss is 400 x (Rs 830 - Rs 790) = Rs 16,000. |
If she had chosen a stop loss market order instead and it filled at Rs 800, the loss would be 400 x Rs 30 = Rs 12,000 - but a market order carries no floor if prices are falling fast.
The buy-side mirror: having sold 400 shares at Rs 830, a buy stop loss with trigger Rs 880 and limit Rs 890 caps the loss if the price rises. Filled at Rs 890, the loss is 400 x Rs 60 = Rs 24,000.
Why NISM asks about it
Chapter 3 (Introduction to Securities Broking Operations, section 3.2.2.1) explains stop orders under price conditions with both a sell and a buy example, and Chapter 3 carries the highest weightage in the paper (20%). Questions test the trigger rule (last traded price reaching or crossing the trigger), the limit-versus-trigger relationship for buy and sell stops, and whether a triggered limit order is guaranteed to execute.
Common exam traps
- A stop loss order is invisible until triggered. It does not sit in the normal order book before the trigger.
- Sell stop: limit <= trigger. Buy stop: limit >= trigger. Getting the direction wrong is the most common error.
- A triggered stop loss limit order is not guaranteed to execute. It needs a counter order at the limit price or better; if the price gaps through the limit, it can remain unfilled.
- A buy stop is triggered when the last traded price reaches or exceeds the trigger - not the best bid.
- Stop loss is a price condition, unlike IOC (a time condition) and disclosed quantity (a quantity condition).
Where this is taught
- Series IV · Chapter 6: Trading Mechanism in Exchange Traded IRDintroduced here
- Series XVI · Chapter 6: Trading Mechanismintroduced here
- Series I · Chapter 6: Trading Mechanism in Exchange Traded Currency Derivativesintroduced here
- Series VIII · Chapter 6: Trading Mechanismintroduced here
- Series VII · Chapter 3: Introduction to Securities Broking Operationsintroduced here
Related terms
- Disclosed QuantityAn order condition that shows the market only part of the total quantity — once that visible slice trades, the next slice is automatically released, repeating until the whole order is filled.
- Immediate or CancelA time condition on an order: whatever can be matched the moment it reaches the market is executed, and any unmatched balance is cancelled immediately rather than waiting in the order book.
- Order bookThe live electronic list of unmatched buy and sell orders for a contract, arranged by price level, showing quantity and number of orders at each price — generally up to five price levels a side.
- Limit orderAn order to buy or sell a contract at a specified price or better — lower for a buy, higher for a sell — which waits in the order book if it cannot be matched at once.
- Market orderAn order to buy or sell a contract at the best price currently available in the market — no price is specified, so it trades immediately against the opposite side of the order book.
- Trailing stop lossA broker-level stop loss order whose trigger moves up with the price by a set rupee amount or percentage but never moves down, so it limits loss and locks in part of any gain.
- Good-Till-TriggerA broker-side resting instruction that sits outside the exchange until a chosen trigger price is touched, at which point it is converted into an ordinary order and pushed to the exchange.
- Market order with protectionA combination of a market order and a limit order that lets a market order execute only up to a price level specified by the trader, so it cannot be filled at any price.
- Day orderAn order valid only for the single trading day on which it is entered — if not executed by the end of the day, the trading system automatically cancels it.