Stop orders can be used to help you protect gains or limit losses when selling. Setting a stop price means that a sale must happen at or below that price before the rest of your order is filled. So if you had a stop order set for $50, then your order would become a market order as soon as the stock sold at or below $50. Market orders can be risky in this case, though, since a single blip in a stock price could cause you to sell prematurely. Also, if the stock is dropping quickly, your market order could be filled at a much lower price than the stop was triggered at. See my limit order post here.

Using a stop limit order provides some protection of this, but with a cost attached. Let’s say you had a stop set at $50 with a limit set at $51.00. Then if the price dropped to $50, and your stop was met, your order would be converted to a limit order of $51. The obvious downside is that if a stock is tanking, it may not get back up to your limit price. Even setting the limit price below the stop price may not save you if the stock drops in a hurry. So using limits on stop orders can protect against short-term blips, but may preclude you from selling at all.

The main uses of stops are to protect gains and limit losses. So you might set a stop order 10% below your purchase price to ensure that the most you lose would be around 10%. Again, because of the nature of stops, you could wind up losing more if the stock drops quickly. You could also protect gains by placing a stop between the current price and the price you paid. So if your $50 stock is at $60 (a 20% gain) you might set a stop at $57.50 in an attempt to lock in a gain of 15%.