Define: Stop-Loss Order

A stop-loss order is a type of order placed by an investor to automatically sell a security if it reaches a certain price, known as the stop price. It is used to limit potential losses and protect against further declines in the security’s value.

When a stop-loss order is triggered, it becomes a market order and is executed at the next available price. This means that the actual execution price may be different from the stop price, especially in volatile market conditions.

No, a stop-loss order does not guarantee a specific execution price. It only triggers a market order to sell the security once the stop price is reached. The actual execution price may be higher or lower than the stop price.

Stop-loss orders are commonly used for stocks, but they can also be placed on other types of securities such as exchange-traded funds (ETFs) and mutual funds. However, they may not be available for certain illiquid or thinly traded securities.

Stop-loss orders are typically valid until they are triggered or canceled by the investor. However, some brokerage firms may offer options to set a specific time frame for the order, such as a day order or a good-till-canceled (GTC) order.

Yes, you can modify or cancel a stop-loss order at any time before it is triggered. However, once the stop price is reached and the order is triggered, it cannot be modified or canceled.

While stop-loss orders can help limit losses, they also come with certain risks. In volatile markets, the execution price may deviate significantly from the stop price, resulting in a larger loss than anticipated. Additionally, stop-loss orders can be triggered by temporary price fluctuations, leading to unnecessary selling.

Yes, stop-loss orders can be used for short-selling as well. In this case, the stop price would be set above the current market price, and the order would trigger a buy order to cover the short position once the stop price is reached.

Most brokerage firms do not charge additional fees for placing stop-loss orders. However, it is always advisable to check with your specific brokerage firm to understand their fee structure.

The use of stop-loss orders depends on individual investment strategies and risk tolerance. While they can be useful tools for managing risk, they may not be suitable for all investors or in all market conditions. It is important to carefully consider your investment goals and consult with a financial advisor before using stop-loss orders.