How Does a Stop-Loss Order Work?
You set a stop price below the current market price. If the stock drops to that level, the stop-loss converts into a market order and sells at the next available price. For example, if you own a stock at $100 and set a stop-loss at $90, the order triggers if the price hits $90, aiming to limit your loss to roughly 10%.
What Is the Difference Between a Stop-Loss and a Stop-Limit?
A stop-loss becomes a market order once triggered, selling at whatever price is available. A stop-limit order converts into a limit order instead, selling only at or above a specified limit price. Stop-limits offer price control but risk not executing if the stock gaps below your limit.
What Are the Limitations of Stop-Loss Orders?
In fast-moving markets, the execution price can be significantly below the stop price (called slippage). Overnight gaps caused by after-hours news can also skip past your stop entirely. Short-term volatility may trigger a stop-loss prematurely, locking in a loss on a stock that quickly recovers.
Frequently asked questions
What is a good stop-loss percentage?
Common stop-loss levels range from 5% to 15% below the purchase price, depending on the stock's volatility and your risk tolerance. More volatile stocks may need wider stops to avoid being triggered by normal price swings.
Do professional traders use stop-loss orders?
Many do, but strategies vary. Some professionals use mental stops or options-based hedging instead of hard stop-loss orders to avoid being shaken out by temporary dips. The right approach depends on your trading style and risk management framework.