Stop-Loss Order

What Is a Stop-Loss Order?

A stop-loss order is a type of order type placed with a brokerage to sell a stock, exchange-traded fund (ETF), or other security when its market price drops to a chosen level, called the stop price. Once the stop price is reached, the order becomes a market order and is filled at the best available price. Investors use stop-loss orders to cap how much they could lose on a position without having to watch the market constantly.

How It Works

Suppose an investor buys shares at 50 dollars and places a stop-loss order at 45 dollars. If the price falls to 45 dollars, the broker sends a sell order. The sale is not guaranteed to happen exactly at 45 dollars. In a fast-moving or thinly traded market, the shares may sell at a lower price, a difference known as slippage. This risk is greatest during sharp drops, when prices can gap down past the stop level overnight or after news.

A stop-loss order remains in effect until it is filled or canceled, and it is typically set with a time in force instruction such as "good till canceled."

Stop-Loss Orders and Risk

Stop-loss orders can help investors define their downside in advance and remove some emotion from selling decisions. They also have limitations. A temporary dip can trigger a sale before a stock recovers, locking in a loss. Because the order becomes a market order, the final price is not fixed. Some brokers offer a stop-limit order, which sets both a stop price and a minimum sale price, but that version may not fill at all if the market moves past the limit.

Investors often compare stop-loss orders with other risk tools, such as trailing stop order and stop-limit order, to see which fits their approach. Understanding how a stop-loss order is triggered and filled is important before relying on it to manage risk.