stop-loss order
An order placed with a broker to sell a security when it reaches a specified price, limiting an investor's loss on a position.
Example
“She set a stop-loss order at $45 after buying the stock at $50, limiting her maximum loss to 10%.”
Memory Tip
STOP-LOSS = it automatically STOPS your LOSS at a predetermined price.
Why It Matters
Stop-loss orders help protect your investment portfolio by automatically limiting losses when market conditions turn unfavorable. This is especially important for individual investors who cannot monitor their positions constantly throughout the trading day. Using stop-loss orders can reduce emotional decision-making and help preserve capital for future investment opportunities.
Common Misconception
Many people believe that a stop-loss order guarantees they will sell at exactly the specified price, but in reality the order becomes a market order once triggered and may execute at a lower price during fast-moving markets. Additionally, some investors think stop-loss orders prevent all losses, when they actually only limit losses to a predetermined level that you choose.
In Practice
Suppose you buy 100 shares of a stock at $50 per share for a total investment of $5,000. You place a stop-loss order at $45 per share to limit your potential loss to $500. If the stock price drops to $45, your shares automatically sell at or near that price, preventing further losses if the stock continues declining to $30.
Etymology
Plain English: an order designed to STOP a LOSS at a specific price level.
Common Misspellings
Trade stocks, options & crypto commission-free
Related Terms
More in trading
Other trading terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.