Stop-Loss Order

A stop-loss order is a risk management tool that automatically sells your position if the price falls to a level you've predetermined. If you buy a stock at $100 and set a stop-loss at $90, the stock will automatically be sold if it drops to $90, limiting your loss to roughly 10%.

When the stop price is triggered, the stop-loss becomes a market order and executes at the next available price. In normal conditions, this is very close to the stop price. In fast-moving markets or gaps (where the price jumps past your stop level), the execution price may be worse than the stop price.

Stop-loss orders serve multiple purposes: limiting losses on individual positions, protecting profits by setting a trailing stop, enforcing sell discipline (removing emotion from the decision), and managing portfolio risk. They're especially useful when you can't monitor positions throughout the trading day.

A trailing stop-loss moves with the stock price — it follows the price up but doesn't move down. If you set a 10% trailing stop on a stock at $100, the stop starts at $90. If the stock rises to $120, the stop moves up to $108. If the stock then drops to $108, it sells, locking in an 8% gain instead of a potential loss.

The main risk of stop-losses is being "stopped out" during temporary dips. A stock might drop 10%, trigger your stop, and then immediately recover. You've sold at the bottom instead of riding through the volatility. This is why setting the right stop level — not too tight, not too loose — requires thought about each position's typical volatility.