What a stop order actually does

According to Investor.gov's explanation of order types, a stop order becomes a market order once the stock reaches the specified price. A stop-limit order instead becomes a limit order.

A market order seeks execution but does not guarantee price. A limit order controls price but may not execute. Neither structure can promise both the planned exit and the planned price in every market condition.

A gap bypasses the planned fill

Imagine 100 shares bought at $50 with a planned stop at $48. Ignoring costs, the position-sizing estimate is a $200 loss.

If unexpected news arrives after the close and the stock next trades at $42, a stop market order may execute near $42. The estimated loss becomes roughly $800, not $200. The stop trigger did not fail; the assumption that it would fill at $48 did.

Actual loss = Shares × |Actual entry − Actual exit| + Costs

Slippage fields model an assumed adverse difference, but they cannot predict a specific gap. Testing a custom exit well beyond your stop is a more useful stress check than treating one slippage input as a worst case.

What changes gap exposure?

  • Holding period: Overnight and weekend positions can be exposed while continuous trading is unavailable.
  • Events: Earnings, regulatory decisions and unexpected company news can abruptly change prices.
  • Liquidity: Wide spreads and limited orders near the market can worsen execution.
  • Position size: A larger notional position magnifies the dollar impact of the same gap.
  • Leverage and shorts: Financing, margin calls and theoretically unlimited short losses add further risk.

Use more than one exit scenario

RiskSized provides stop, target and custom exit outcomes. Enter a custom exit below a long stop or above a short stop to see an illustrative gap loss as dollars and a percentage of equity. This does not establish a maximum possible loss.

Position size is your controllable input.

You cannot choose the next opening price, but you can choose notional exposure and concentration. A smaller position may make an adverse gap more survivable even when the planned stop remains unchanged.

Keep the wording honest

“Planned stop loss” or “estimated loss at stop” is more accurate than “maximum loss.” The risk budget is a planning convention, not an insurance policy. Review your broker's order behavior and consider whether the position fits losses well beyond the planned exit.

Reviewed November 1, 2026 · Source: Investor.gov order-type guidance · Educational content, not investment advice.