stop-loss order

noun
Updated on: 26 Jul 2017

Definition of stop-loss order

There's more!

Love words? You must — there are over 200,000 words in our free online dictionary, but you are looking for one that’s only in the Merriam-Webster Unabridged Dictionary.

Start your free trial today and get unlimited access to America's largest dictionary, with:

  • More than 250,000 words that aren't in our free dictionary
  • Expanded definitions, etymologies, and usage notes
  • Advanced search features
  • Ad free!
Already a subscriber? Log in.

Financial Definition of STOP-LOSS ORDER

stop-loss order

What It Is

A stop-loss order (also called a stop order or stop market order) is an order whereby the investor instructs the broker to automatically sell the stock if it drops to a certain price.

How It Works

For example, let's assume that you own 100 shares of Company XYZ stock, for which you have paid $10 per share. You are expecting the stock to hit $12 sometime in the next month, but you do not want to take a huge loss if the market turns the other way.

You direct your broker to set a stop-loss order at $8.50. If the stock goes up, you will realize all of the benefits. If the stock goes down and touches $8.50, your broker will automatically place a market order to sell your shares.

It is important to note that when the stop-loss order is triggered, it becomes a market order. You will not necessarily receive $8.50 per share; you will most likely receive a little more or a little less.

Why It Matters

Stop-loss orders generally are a trading or short-term investing strategy. They are useful because they help reduce the pressure of monitoring your trade day-to-day; the trade is largely set on autopilot. This can be particularly helpful for emotional investors.

Even though stop-loss orders offer crucial trading discipline to investors by helping them make important decisions about cutting losses, they also increase the risk of getting out of a position too early -- especially when volatile stocks are involved. In our example, if XYZ was known to be volatile and fluctuated from $8.00 to $12.50 during the one-month forecasting period, then you would miss out on the price appreciation that you expected.

Long-term buy-and-hold investors probably don't want to make substantial use of stop-loss orders. When a stock goes lower, stop-loss orders will lock in losses rather than give you a chance to evaluate whether a slight price decline is actually signaling a buying opportunity.


Seen and Heard

What made you want to look up stop-loss order? Please tell us where you read or heard it (including the quote, if possible).

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!

WORD OF THE DAY

agreeable, attractive, or delicious

Get Word of the Day daily email!

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!