Stop-Loss Order

A stop-loss order, often just called a stop, is an order placed with a broker to sell a security when it reaches a specified price. Its primary purpose is to limit an investor's loss on a position by automatically triggering a sale if the price falls to a predetermined level. For example, if you buy a stock at $100 and set a stop-loss at $90, your shares will automatically be sold if the price drops to $90. This limits your maximum loss to 10% on that position, preventing larger losses if the stock continues falling. Stop-loss orders can be set as stop-market or stop-limit orders. A stop-market order becomes a market order when triggered, executing at the best available price which may be below the stop price in fast-moving markets. A stop-limit order becomes a limit order when triggered, only executing at the limit price or better but risking non-execution if prices gap through the limit. Advantages of stop-losses include automatic execution without constant monitoring, emotional discipline (the decision is made in advance), and clearly defined maximum losses. They're particularly useful for active traders managing multiple positions and for investors who can't watch the market constantly. However, stop-losses have limitations. In volatile markets, prices can temporarily dip to trigger your stop before recovering, a frustrating situation called getting "stopped out." In very fast-moving markets, slippage between the stop price and execution price can result in larger losses than intended. Some investors avoid stops on long-term holdings, preferring to ride out volatility. Setting appropriate stop levels requires balancing protection against normal price fluctuations. Too tight a stop and you'll be constantly stopped out by normal volatility. Too loose and you're not really limiting losses. The right stop level depends on the stock's volatility, your risk tolerance, and your investment thesis.