What is Stop-Loss Order?

Full Definition

A stop-loss order is an instruction given to a broker or trading platform in advance to automatically sell a share, fund or other tradeable investment if its price falls to a specified trigger level, without the investor needing to actively monitor and decide to sell in the moment, and is used primarily as a tool to limit losses on a position rather than to try to maximise gains. For example, an investor holding shares bought at £10 might set a stop-loss at £8.50, meaning that if the price falls to that level, the broker will automatically attempt to sell the holding, capping the loss on that position at roughly 15% rather than allowing it to fall further unchecked while the investor is not watching the market. A standard stop-loss order becomes a regular market sell order once triggered, meaning the actual sale price achieved can, in a fast-falling or volatile market, end up somewhat below the trigger level itself (known as slippage), which a stop-limit order variant addresses by only executing at the trigger price or better, at the cost of the possibility that the order does not execute at all if the price gaps down sharply through the limit. Stop-loss orders are more commonly used by active traders managing individual share positions than by long-term investors holding diversified funds for retirement or other long-term goals, since a long-term investor riding out normal, expected market volatility over many years may not want a temporary dip to automatically trigger a sale that crystallises a loss and takes them out of the market before an eventual recovery.

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