In trading, a stop market order is an order made to a broker by which a sale or purchase of securities is triggered when a specific price is reached. The order becomes a market order if and when the price of a security matches the specified price. Securities are then sold at the best available bid or bought at the best available offer.
Example: An investor buys shares in an investment fund for 84 Swiss francs per share. To safeguard their investment against serious loss, the investor places a stop market order with a stop threshold of 81 Swiss francs. Their broker buys the shares, but notes the stop threshold attached to the stop market order. If the price of the shares falls to 81 Swiss francs, a market order will be triggered and the broker will sell the shares at the best available bid from buyers. Once the market order has been triggered, the broker will sell the shares as quickly as possible even if the best available bid from buyers is only 79 francs per share.
Stop market orders can be used to safeguard investment positions against sudden, drastic drops in market rates because the securities are sold as quickly as possible when their value falls below the stop threshold. Limit orders, on the other hand, prevent assets from being sold for less than a predefined limit, making them less suitable for safeguarding investments against depreciation because positions will not be closed unless they can be sold at the specified amount.