Stress plays a role in most conceptualizations of the etiology of psychotic disorders. This is based on extensive research showing an association between the incidence of psychosis and psychosocial stress exposure (e.g., stressful life events and trauma) both in childhood and the weeks preceding a psychotic episode. There is also evidence of increased sensitivity to stressful events and dysregulation of biological stress systems. To better understand the relation of stress with the initial emergence of psychosis, research has increasingly focused on the psychosis prodrome, the period of functional decline that precedes clinical illness. Preliminary results suggest that increased incidence of early childhood trauma, heightened sensitivity to psychosocial stress, and dysregulation of biological stress response systems are present in the prodrome and associated with the onset and severity of psychosis. The current paper reviews this research and discusses the possible mechanisms responsible for these associations. This discussion includes the possible effect of stress on the hypothalamic-pituitary-adrenal [HPA] axis and hippocampus, and the role adolescent developmental changes may play in mediating this effect. Further longitudinal research combining clinical and biological measures of stress with techniques designed to assess developmental change in neural structure and function, cellular mechanisms, and genetic and epigenetic factors are critical for elucidating the role stress plays in the pathophysiology of psychotic illness.