Stop-Loss Order

An order to automatically sell a stock when it drops to a specified price to limit losses.

What Is a Stop-Loss Order?

A stop-loss order is an instruction to your broker to automatically sell a stock if it falls to a specific price. It's the most important risk management tool available to investors — essentially an automated safety net that prevents small losses from becoming catastrophic ones.

How Stop-Losses Work

You set a stop-loss at a price below your purchase price. If the stock hits that level, your broker automatically sells. For example, if you buy a stock at $100 and set a stop-loss at $92, you're limiting your potential loss to 8%.

Types of Stop-Loss Orders

• Fixed stop-loss: Set at a specific price. Simple and straightforward.
• Trailing stop: Moves up with the stock price. If the stock goes from $100 to $120 with a 10% trailing stop, your stop moves from $90 to $108 automatically. You lock in gains while maintaining downside protection.
• Time stop: Selling if the stock hasn't performed as expected within a certain timeframe.

The Cardinal Rule

Set your stop-loss before you enter a trade, not after. And once it's set, don't move it lower. Discipline with stop-losses is what separates successful traders from those who blow up their accounts.