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stop loss order

Contributor(s): Matthew Haughn

A stop loss order is a market order that sets a minimum value, below which an investment broker sells a stock or other security at the next available time.

This order limits the potential for loss and as such, stop loss orders are an essential part of calculating the risk reward ratio of an investment.  Without this loss cutting measure, an investment has unlimited loss potential making the ratio incalculable: The entire investment can be lost unless there is either a stop loss order or a keen eye on the investment along with shrewd, unemotional and decisive action. Without a broker and a stop loss order, an investor is responsible for this decision.

Stop loss orders are common for longer term investments and can be useful for those who aren't able to consistently watch a stock. The decisive upfront decision on the maximum amount of tolerable loss also helps prevent an investor from behaving more like a gambler.

Stop loss orders aren’t foolproof. Although they can help limit risk, there’s no guarantee that they will limit the loss exactly at the established value, because the stock can only be sold while markets are open. Should a sudden drastic change occur outside of those hours, an investment might close one day well above the targeted value for a stop loss and open the next day significantly below it.

See an introduction to stop loss orders:

This was last updated in February 2016

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