What Is a Stop-Loss and How to Use It

Short answer: A stop-loss is a pre-set order that automatically sells a stock once it falls to a chosen price, limiting your loss and removing emotion from the decision.

How a Stop-Loss Works

You set a trigger price below your purchase price. If the stock falls to that level, the stop-loss order activates and sells the position. This caps your potential loss without you having to watch the market constantly or make a panicked decision in the moment.

Types of Stop-Loss Orders

A stop-loss market order sells at the best available price once triggered, which guarantees execution but not price. A stop-loss limit order sets a minimum acceptable price, which controls price but may not execute in a fast-falling market. Choose based on whether certainty of exit or certainty of price matters more.

Where to Place It

There is no perfect level. Place it too tight and normal volatility may trigger it prematurely; place it too wide and losses grow. Many traders set it based on a percentage, a technical support level, or how much they are willing to risk on the trade.

Trailing Stop-Loss

A trailing stop-loss moves up as the stock rises, locking in gains while still protecting against a reversal. It lets winners run while limiting how much profit you give back if the trend turns.

Limitations

In very volatile or gapping markets, the actual sale price can be worse than the trigger (slippage), especially with market orders. Stops also do not protect against overnight gaps if you hold positions across sessions.

Practical Discipline

Stop-losses are most valuable for traders and for managing concentrated positions. Decide your exit before you enter the trade, size positions so a stop-out is survivable, and respect the stop rather than moving it lower out of hope.

This explainer was written by The Dispatch desk to answer a question readers commonly ask. It is general information, not personalised financial advice.