The most important benefit of a stop-loss order is that it costs nothing to implement. Your regular commission is charged only once the stop-loss price has been reached and the stock must be sold. One way to think of a stop-loss order is as a free insurance policy. Let’s look at some real-world examples where a stop-limit order could be a part of a well-planned trading strategy.

For example, if you place a buy limit order, the trade will only be executed if the stock reaches your specified price or falls below it. Conversely, if you place a sell limit order, the trade will only go through if the stock hits your stated price or rises above it. A stop-loss order becomes a market order to be executed at the best available price if the price of a security reaches the stop price.

Stop-loss order vs market order

A stop-limit order is similar to a basic stop order, but with one added condition. With a stop limit, the investor not only specifies a stop price, but also a stop limit price. If the security in question reaches the stop price, this will trigger a limit order (instead of a market order for a regular stop order). The trade will only execute once the trigger price is reached and the limit price can be executed.

• The main disadvantage is that a short-term fluctuation in a stock’s price could activate the stop price.
• Once placed, the stop order will convert to a market order if and when the stop price is reached.
• For example, setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%.

If F trades at $21.50 or above, your broker will buy you 100 shares up to a price of $21.60. Now, if the price declines to $10, your broker will sell as many of the 100 shares as possible, down to a price of $9.80. You may be able to sell all of them or only a handful — but you won’t sell any below the $9.80 level.

Three order types in stock trading you should know

In short, you’re establishing a limit and affirming that you don’t want to buy stocks above a certain point or sell them below a specific value. Traders are strongly urged to always use stop-loss orders whenever they enter a trade, in order to limit their risk and avoid a potentially catastrophic loss. In short, stop-loss orders serve to make trading less risky by limiting the amount of capital risked on any single trade. Investors can place stop orders that are day orders, good ’til canceled (GTC) orders, or set specific expiration dates. Stop orders can remain in place for a long time, and will not execute at all if the stop price is never reached. No matter what type of investor you are, you should be able to easily identify why you own a stock.

Stop-limit orders can be useful for active traders, especially those who trade penny stocks. Your stop-limit order may get filled in three separate trades over multiple days due to the lack of liquidity. Similar to the above example, your stop may get triggered and you’re looking to sell out of your 1,000 shares. But due to a lack of liquidity, you only sell a fraction of your position.

#1 Stop-Limit Order Risk: You May Not Get Filled

Stop orders are a tool that investors use to manage market risk and a convenient way to avoid frequently checking the market to sell (or buy) once a specific price target is reached. A market order is the most common order type, and brokerages will typically enter your order as a market order unless you indicate otherwise. An order of this type guarantees the execution but not the price at which the order will be executed. A stop-loss order is meant to protect you from loss (by triggering an exit from your position) if the market moves too far in the wrong direction.

Stop-loss orders are orders with instructions to close out a position by buying or selling a security at the market when it reaches a certain price known as the stop price. StocksToTrade in no way warrants the solvency, financial condition, or investment advisability ofany of the securities mentioned in communications or websites. In addition,StocksToTrade accepts no liability whatsoever for any direct or consequential loss arising from any useof this information.

How Does a Stop-Loss Order Limit Loss?

A value investor’s criteria will be different from the criteria of a growth investor, which will be different from the criteria of an active trader. No matter what the strategy is, the strategy will only work if you stick to it. So, if you are a hardcore buy-and-hold investor, your stop-loss orders are next to useless. Long-term investors shouldn’t be overly concerned with market fluctuations because they’re in the market for the long haul and can wait for it to recover from downturns. However, they can and should evaluate market drops to determine if some action is called for. For example, a downturn could provide the opportunity to add to their positions, rather than to exit them.

Key Takeaways

If a stock has a huge amount of liquidity historically, you may be better off using a stop-order without a limit. You’re still holding 900 shares that are below your stop-loss level. Having a limit on your order in an illiquid stock means your order may be gradually filled as buyers pop up throughout the session to purchase the stock. Alternatively, you may only want the order filled in that day’s trading session. In that case, you’d use a day order to tell the exchange to cancel the order if it isn’t filled by the end of the day. Stop-loss orders also help insulate your decision-making from emotional influences.