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What Is a Stop-Loss Order?

Steven Levine, Founder of TickerPosts and OpenClassActions.com1 min readLast reviewed

A stop-loss order is an instruction to sell a security after it reaches a specified stop price. Many investors use stop orders as a risk-management tool, but the name can make them sound more precise than they are.

How a stop-loss order works

Suppose you own a stock at $50 and place a stop-loss order at $45. If the stock trades at or below $45, the stop order is triggered. In many cases it then becomes a market order, meaning it seeks execution at the best available price.

The important detail is that the stop price is not a locked-in sale price. If a stock gaps down from $46 to $40 on bad news, a stop-loss order may execute near $40 rather than $45. The order helped you exit, but it did not lock in the stop price.

Stop-loss vs. stop-limit

A stop-limit order adds a second number: the limit price. Once the stop price is reached, the order becomes a limit order rather than a market order.

That gives you more control over the minimum sale price, but it creates another risk. If the market moves past your limit price, the order may not fill at all. You may still own the stock during a larger decline.

When to be careful

Stop orders deserve extra caution around:

  • Earnings releases and major news.
  • Thinly traded stocks with wide bid-ask spreads.
  • Premarket and after-hours moves.
  • Highly volatile names promoted heavily online.

A stop order is a tool, not a shield. Before using one, decide whether your bigger concern is getting out quickly or controlling the worst acceptable execution price.

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