Stop-Loss Order

A stop-loss order is an instruction to automatically sell a stock if its price falls to a specified level. It's a risk-management tool designed to limit potential losses, though it doesn't guarantee a specific sale price.

Formula

"Sell 100 shares of AAPL if it falls to $140" (assuming it's currently at $155)

When the stock price touches or drops below $140, the order automatically converts to a market sell order and executes.

Example

You buy Apple (AAPL) at $160. To protect against a major decline, you place a stop-loss order at $150. If AAPL falls to $150, your stop order triggers and converts to a market sell order, automatically selling your shares. This limits your loss to $10 per share (about 6.25%) rather than letting the stock fall to $140 or lower.

How to Interpret It

• Stop price: The price level that triggers the order. When the stock touches this price, the stop becomes a market order.
• Protection: Stop-loss orders help prevent catastrophic losses by selling automatically before a stock crashes further.
• Gap risk: If a stock gaps down past your stop price due to bad news, your order executes at a much worse price than you expected.
• Whipsaw risk: In volatile stocks, a stop-loss can trigger on a temporary dip, selling you out just before the stock recovers.
• Common stops: A 5-10% stop below entry is typical for active traders; long-term investors often use larger stops (15-20%) to avoid being shaken out.

Limitations

• A stop-loss doesn't guarantee your sale price. During gaps or fast declines, you might sell at a price far worse than your stop.
• Stop-loss orders can be triggered by temporary price dips, causing you to exit a position you wanted to keep.
• Stop-loss orders are ineffective overnight or during pre-market/after-hours when the stock can gap past them.
• They can create a cascade effect; many traders use similar stop prices, so large stops can trigger coordinated selling.

Related Terms

• Market Order — what your stop-loss becomes when triggered
• Limit Order — similar to stop-loss but with price control
• Risk Management — strategies to limit losses
• Trailing Stop — a stop-loss that adjusts as price rises