Getting Started Building a Trading Career Tools and Resources Glossary - Backtesting
- Backtesting Depth
- Bear Market
- Bull Market
- Candlestick
- Charting
- Chart Patterns
- Day Trading
- Dividend Yield
- ETF
- Fundamental Analysis
- Leverage
- Limit Order
- Index Fund
- Margin Trading
- Market Capitalization
- Mutual Fund
- Market Trends
- Moving Averages
- Price-to-Earnings Ratio (P/E Ratio)
- Portfolio Diversification
- Positions in Prosperse
- Risk Management
- Scalping
- Short Selling
- Stock Alerts
- Stock Scanning
- Stock Screener
- Stop-Loss Order
- Support and Resistance
- Swing Trading
- Take Profit
- Technical Analysis
- Trend Lines
- Volatility
Glossary - Stop-Loss Order
Stop-Loss Order definition
An instruction given to a broker to buy or sell a security once it reaches a specified price, known as the stop price.A stop-loss order is an instruction given to a broker to buy or sell a security when it reaches a certain price, known as the stop price. This type of order is commonly used by investors to limit potential losses or protect profits on an existing position. Once the stop price is reached, the stop-loss order becomes a market order and is executed at the best available price.
Use Cases
For example, if an investor owns a stock currently trading at $50 and wants to limit their losses to no more than 10%, they might set a stop-loss order at $45. If the stock price falls to $45, the stop-loss order is triggered, and the stock is sold, helping the investor avoid further losses.
Stop-loss orders are particularly useful in volatile markets where prices can change rapidly. They provide a level of automation that can help manage risk without the need for constant monitoring of the market.
Related Terms:
- Volatility: A measure of how much the price of an asset fluctuates over a period of time.
- Portfolio Diversification: A risk management strategy that involves spreading investments across different asset classes to reduce exposure to any single asset or risk.
Frequently Asked Questions
What is a stop-loss order?
A stop-loss order is an instruction given to a broker to buy or sell a security once it reaches a specified price, known as the stop price. It’s used to limit potential losses or protect profits by automatically closing a position when the price moves against the investor.
How does a stop-loss order work?
When a security reaches the stop price, the stop-loss order is triggered and becomes a market order. The broker will then execute the order at the best available price, helping the investor manage risk by exiting the position.
When should I use a stop-loss order?
Stop-loss orders are commonly used when an investor wants to limit potential losses on an existing position or protect profits. They are particularly useful in volatile markets where prices can change rapidly.
Can I set a stop-loss order on any security?
Yes, stop-loss orders can be set on most types of securities, including stocks, bonds, and ETFs. However, it's important to check with your broker for specific rules and conditions regarding stop-loss orders on different assets.
What are the risks of using a stop-loss order?
While stop-loss orders can help manage risk, they are not foolproof. In highly volatile markets, the price at which the order is executed may differ significantly from the stop price due to rapid price movements, known as slippage. Additionally, setting the stop price too close to the current market price may result in the order being triggered prematurely.
How is a stop-loss order different from a limit order?
A stop-loss order becomes a market order once the stop price is reached, meaning it will be executed at the best available price. A limit order, on the other hand, is an order to buy or sell a security at a specific price or better, and it will only be executed at that price or better, not necessarily at the current market price.
