Stop-Loss Order

A stop-loss order is a type of order that is placed with a broker to sell a security once the price of the security reaches a certain level. This is done to protect the investor from further losses if the price of the security continues to decline.

There are two types of stop-loss orders: market orders and limit orders. A market order is an order to sell a security at the best available price. A limit order is an order to sell a security at a specific price or better.

Stop-loss orders can be used with any type of security, including stocks, bonds, and options. They are most commonly used with stocks, however, because the price of stocks can fluctuate more rapidly than the price of other types of securities.

Stop-loss orders can be a valuable tool for investors who want to protect their portfolios from losses. However, it is important to understand how stop-loss orders work before using them. Investors should also be aware that stop-loss orders are not always executed at the desired price.

Here is an example of how a stop-loss order can be used to protect a portfolio from losses. An investor owns 100 shares of a stock that is currently trading at $50 per share. The investor is concerned that the price of the stock may decline, so they place a stop-loss order to sell the stock at $45 per share.

If the price of the stock falls to $45 per share, the stop-loss order will be executed and the investor will sell their shares at that price. This will prevent the investor from losing any more money if the price of the stock continues to decline.

It is important to note that stop-loss orders are not guaranteed to be executed at the desired price. If the price of the stock moves rapidly, the stop-loss order may be executed at a price that is higher or lower than the desired price.

Stop-loss orders can be a valuable tool for investors, but it is important to understand how they work before using them. Investors should also be aware that stop-loss orders are not always executed at the desired price.