A stop order is used to enter a trade at a specific price level that is worse than the current market price. For long positions (ie ‘Buy when price is’) the specified price is above the current market price. For short positions (ie ‘Sell when price is’), it is below the market price.
The execution of a stop market order is not guaranteed at the exact stop price; it will be executed at the best available market price once the stop price is reached. This means that if there's a gap in the market, as might happen during market opening hours, the order may be executed at a price that is worse than the stop price.
The advantage of this order is that you can secure entry to a market where you believe the trend will continue, or where you expect a significant market movement (for instance where there has been news overnight that is likely to impact the market opening price). However, the opening price will be determined by market conditions and is not limited to a set level. Therefore, if the stop orders may experience slippage on the entry price.
Example of a stop order slippage:
A US pharmaceutical company closes at $2.50 per share. Whilst the market is closed, the company announces they’ve completed a successful trial of a new drug that is a dramatic improvement on the current market leader.
Anticipating that this will significantly increase the value of the company, you place a ‘Buy when price is’ Stop order for 100 shares at $2.60 per share. However, there is strong interest from other market participants, and when the market opens, the opening price is $3.00 per share. As the market did not trade at $2.60, your stop order is filled at the next available level, which in this illustrative example is $3.00.