BROWSE

Stop-Loss Order

A stop loss order is an order that is placed with a broker because a stock has reached a certain price. This is basically designed to limit the loss that an investor might suffer on a position in a security. A lot of investors associate stop loss order with long position, but it is important to know that it can be used as a short position. In such a case, the security is bought if it is above the given price.

The stop loss order is very effective since it takes out all the emotions when it comes to taking trading decisions. However, these executions are not always guaranteed especially where the trading in stock is halted, which is also known as a stop market order.

In order to understand the concept, let’s use an example. If you set up a stop loss order for 10% below the price at which you buy the stock, your loss will be limited to 10%. So if you buy an Apple stock for $10 per share, your stop loss order will be $9. This would mean that if the stock’s price falls below $9, the shares will be sold at the market price that will be prevailing at that moment.

Advantages and Disadvantages of Stop Loss Order

One of the biggest advantages of stop loss order is that you can be stress free, because you won’t have to see how the stock is performing on a daily basis. This can come in handy when you are on a leave or on vacation where you can’t watch your stocks.

Because every coin has two sides, stop loss order has disadvantages too. The stop price can get activated even if there is a small term fluctuation in the stock’s price. In order to overcome this, one needs to set a stop loss percentage that will allow the stock to fluctuate and will prevent downside risk to a great extent. Once your stock price is reached, the stop order will become a market order and the price that you will sell at might be a little different than the stop price.


Further Reading


Stop-loss orders and price cascades in currency markets
www.sciencedirect.com [PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …

On immunization, stop-loss order and the maximum Shiu measureOn immunization, stop-loss order and the maximum Shiu measure
www.sciencedirect.com [PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …

The stop-loss start-gain paradox and option valuation: A new decomposition into intrinsic and time valueThe stop-loss start-gain paradox and option valuation: A new decomposition into intrinsic and time value
academic.oup.com [PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …

The causal effect of stop-loss and take-gain orders on the disposition effectThe causal effect of stop-loss and take-gain orders on the disposition effect
academic.oup.com [PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …

When do stop-loss rules stop losses?When do stop-loss rules stop losses?
www.sciencedirect.com [PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …

On stop-loss order and the distortion pricing principleOn stop-loss order and the distortion pricing principle
www.cambridge.org [PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …

Higher degree stop-loss transforms and stochastic orders—(i) theoryHigher degree stop-loss transforms and stochastic orders—(i) theory
link.springer.com [PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …

Distortion risk measures and economic capitalDistortion risk measures and economic capital
www.tandfonline.com [PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …

Stop loss reinsurance <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-QQHE200902029.htm' />Stop loss reinsurance [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-QQHE200902029.htm'>PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …

Risk measures with comonotonic subadditivity or convexity and respecting stochastic ordersRisk measures with comonotonic subadditivity or convexity and respecting stochastic orders
www.sciencedirect.com [PDF]
… Despite their familiarity, such massive moves are as puzzling to economists as they are disruptive to markets … If net price-contingent order flow is typically greater when stop-loss orders dominate than when take-profit orders dominate, one might observe the same result even if …



Q&A About Stop-Loss Order


What is a stop-loss order?

A stop-loss order is an instruction to sell or buy a stock when its price falls below a certain point.

Why do some executions not always happen with stop losses?

These executions are not always guaranteed especially where trading in stocks have been halted, which is also known as "stop market" order.

What does the term "stop loss" refer to?

The term "stop loss" refers to the price at which you want your stock sold if it drops below that price.

How do investors typically use this strategy?

Investors often use this strategy as part of their overall trading plan. They set up their stop losses so they can take action before they lose too much money on any one trade.

How effective are stop loss orders?

Stop loss orders are very effective since they take out all emotions when making trading decisions.

How does one use an example to understand the concept of using stop-losses?

Lets use Apple Inc (AAPL) for this example. If you set up a stop-loss for $1 below the price at which you buy AAPL shares, your potential losses would be limited to $1 per share if AAPL falls below $9 per share and your shares are sold at whatever market price prevails at that moment."

What does it mean when you say that stop loss orders can be used as short positions?

Stop loss orders can be used as short positions. In such cases, the security will be bought if it is above the given price.

When would you use a stop-loss order?

You may use this type of order if you think that the value of your investment will fall in the near future.

What are some examples of stop-loss orders?

Some examples include buying more shares of stock when the market rises, and selling shares when it falls.