With the volatile swings of today’s market, it is very possible to lose much more than you bargained for. Although your maximum loss should be pre-determined before you even enter a position (buy stock), these losses can very easily get out of hand. This is where a stop loss order (A.K.A “stop order” and “stop market order”) comes into play.

So What Is A Stop Loss Order?
A stop loss order is an order that triggers the broker to sell the stock when it reaches a specified price. For example, I bought 500 hundred shares of XYZ @ $10.00. I purchased the stock with the intent of the price increasing, but sometimes the price will decrease. I am willing to lose 5% of my investment, therefore, I will set my stop loss order @ $9.50.

$10.00 - (0.05 x $10.00) = $9.50

The stop loss order will trigger when the stock price of XYZ reaches $9.50, “stopping out” my loss at the pre-determined 5%. Yes, I did lose 5% of the original investment, but it could have easily been 10-15%. The most common stop loss that investors use is the 10% stop loss, leaving room for the price to fluctuate, but everyone is different.

Stop Loss Strategies
A stop loss order can be used as a form of discipline to “stop you out” at 5%, 10%, or whatever percentage you are willing to lose. More often than not, when investors lose 5% of their investment, they want to wait and “hope” for it to bounce back. This can and usually does produce futher losses.

Also, if you are away from your computer or on vacation, stop loss orders can prevent significant losses from your portfolio. Many investors get busy and can’t keep up with their investments. Stop loss orders can be used as a “set it and forget it” strategy because they prevent a major decline in the stock price by “stopping you out”.

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