A stop-loss order is an order placed with a broker to sell a security when it reaches a certain price. Stop-loss orders are designed to limit an investor’s loss on a position in a security. Although most investors associate a stop-loss order with a long position, it can also protect a short position, in which case the security gets bought if it trades above a defined price.
A stop-loss order takes the emotion out of trading decisions and can be useful if a trader is on vacation or cannot watch his or her position. However, execution is not guaranteed, particularly in situations where trading in the stock halts or gaps down (or up) in price. A stop-loss order may also be referred to as a “stop order” or “stop-market order.”
If an investor uses a stop-loss order for a long position, a market order to sell is triggered when the stock trades below a certain price; the order then gets filled at the next available price. This type of order works efficiently in an orderly market; however, if the market is falling quickly, investors may get a fill well below their stop-loss order price.