Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Stop Loss” Stop-Loss is also known as Stop-Loss order
is a tool that traders make in order to prevent or minimize loss and risk.
An order placed with a broker to sell a security when it reaches a certain price.
A stop-loss order is designed to limit an investor’s loss on a position in a security.
Although most investors associate a stop-loss order only with a long position, it can also
be used for a short position, in which case the security would be bought if it trades
above a defined price.
A stop-loss order takes the emotion out of trading decisions and can be especially handy
when one is on vacation or cannot watch his/her position.
However, execution is not guaranteed, particularly in situations where trading in the stock is
halted or gaps down (or up) in price.
With a stop-loss order for a long position, a market order to sell is triggered when the
asset trades below a certain price, and it will be sold at the next available price.
This type of order works well if the market is declining in an orderly manner, but not
if the decline is disorderly or sharp.
Traders also use stop-limit orders which work more effectively in volatile markets.