Next video:
Loading the player...

A stop loss order is an order placed with a broker to sell or buy a stock if it drops to a certain price level. Brokers will place them at no cost to you, they help minimize the emotion of cutting your losses and they are great tools for risk-management when you don't have the time or ability to keep constant track of stock prices.

Stop-loss orders are widely used by investors and sophisticated traders in order to limit potential losses of a security, if the price moves against their intended strategy. Average investors looking for the price of a stock to increase, known as a long strategy, would set a sell-stop order; while a trader looking for the price of the stock to decrease, known as a short strategy, would set a buy-stop order. 

Some investors set stop-loss orders at a predetermined percentage, such as 5% or 10% below the current price. This lets them feel safer about steep drops or spikes in the price of their holdings, knowing they actually got out before the loss could be more severe.

Investors and traders should keep in mind that the stop price could be activated by short-term fluctuations in a stock's price. A recommendation for placing an optimal stop-loss order is to determine a percentage that allows a stock to fluctuate day to day, while preventing as much risk as possible. Setting a 2% stop loss on a stock that has a history of fluctuating 5% or more in a week is not the best strategy. 

Consider the following example: An investor with a long strategy on a stock that costs $50, and that usually trades within a range of $46 to $54, might consider asking her broker to set a stop loss at $44. This way, the stop loss does not trigger a sale from a common price swing of 8%, but would kick in for a riskier drop of 12%.

Investors should also keep in mind that a stop loss order does not guarantee that the stock will be sold exactly at the stop loss price. It promises to sell the stock at the next available price, after hitting the designated stop loss amount. If a stock is falling fast, the next available price may be below the trader's stop loss point; however, this might still save the investor from a much larger loss.

  1. No results found.
Related Articles
  1. Trading

    Protect Yourself From Market Loss

    There are several simple strategies you can use to protect yourself from downside risk.
  2. Trading

    Trailing-Stop/Stop-Loss Combo Leads To Winning Trades

    Combine trailing stops with stop-loss orders to reduce risk and protect portfolio value.
  3. Investing

    Understanding Buy Stop Orders

    A buy stop order is an order to buy a stock at a specific price above its current market price.
  4. Investing

    Trailing-Stop/Stop-Loss Combo For Winning Trades

    Traders use stop-loss orders by setting the maximum they’re willing to lose. A trailing stop is similar.
  5. Trading

    Which Order To Use? Stop-Loss Or Stop-Limit Orders

    Stop-loss and stop-limit orders can provide different types of protection for investors seeking to lock in profits or limit losses. Investors need to know how each type of order works to know ...
  6. Investing

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
  7. Trading

    Manage Risk With Trailing Stops And Protective Put Options

    Using the right strategy can lower the risk of failure and protect your profits.
  8. Investing

    Mastering Stop Placement

    Place the stop loss where, if hit, the reasons you took the trade are no longer valid.
  9. Trading

    Increase Your Profits With Soft Or Mental Stops

    A soft stop provides a trader with added flexibility, allowing him to react to ongoing changes in the market.
Hot Definitions
  1. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  2. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  3. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  4. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
  5. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. ...
  6. Dark Pool

    A dark pool is a private financial forum or exchange for trading securities.
Trading Center