A stop-loss order tells us to sell a stock automatically if its price falls to a level you choose. It's one of the simplest ways to limit how much you can lose on a single position.
How it works
Say you buy a stock at $50 and set a stop-loss at $45. If the price drops to $45, your stop-loss becomes a market order and sells at the next available price. Your maximum planned loss is about 10%.
In a fast-moving market, the sale price can be lower than your stop price. This is called slippage. A stop-limit order avoids slippage by setting a minimum price, but it may not fill at all if the price gaps below your limit.
Choosing your stop level
There's no perfect level, but common approaches include:
- A fixed percentage below your purchase price, such as 8% to 10%.
- Just below a recent support level on the chart.
- A trailing stop that moves up as the price rises, locking in gains.
This guide is for education only and isn't investment advice. Investing involves risk, including the possible loss of principal.
