Stop-Loss Order

Stop-loss order

An order to unwind a position when the price moves against you. This order is designed to limit losses or in some cases to lock in a certain level of profit. As soon as the price of the security hits the stop-loss price (or falls below), the order becomes a market order. If you were short the asset, the stop-loss would trigger a purchase. Stop-losses are often disabled for after hours trading because prices are often quite variable and you could be executed at an unfavorable price. Stop losses are also usually calculated off the bid price (which is a measure of what people are actually willing to pay if the security is sold). Again, one needs to be careful because if there is lack of liquidity, the bid-ask spread could be large and you could be stopped out at an unfavorable price. Finally, some traders have rolling or trailing stop loss. As the price moves up the stop-loss is moved higher (say 20% below the current price).

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Stop-Loss Order

An order to a broker to buy or sell a security at the best available price once a certain, stated price is reached. Suppose that price is $50. A stop order remains inactive until that security begins trading at $50, at which point the broker may fill the order at best price he/she is able to find. A stop-loss order is technically the same as a stop order, but carries the connotation of avoiding further losses rather than seeking to cash in on future gains. See also: Protective stop.

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Stop-Loss Order

What Does Stop-Loss Order Mean?

An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position. A stop order becomes a market order once the stop price has been reached. Also known as a stop order or stop-market order.

Investopedia explains Stop-Loss Order

In other words, setting a stop-loss order for 10% below the price an investor paid for the stock would limit the investor's loss to 10%. It is a good idea to use a stop-loss order before an investor leaves for holidays or enters a situation in which the investor will be unable to watch his or her stocks for an extended period. The downside of a stop order is that since the order becomes a market order when the stop price is hit, instead of a limit order, the investor never knows the price at which the order will be executed.

Related Terms:
• Buy to Cover
• Downtrend
• Market Order
• Stop Order
• Stop-Limit Order