Table of Contents
What is a stop-loss order?
How do stop-loss orders work?
How do investors use stop-loss orders?
What is a trailing stop loss order?
The bottom line
Jul 25, 2022
5 min read
Learn all about how stop-loss orders can help investors achieve a variety of goals by setting floor and ceiling prices that can limit a loss or lock in a profit.
A stop-loss order is a type of trading order that occurs when a stock, commodity, derivative, exchange-traded fund (ETF) or some other investment reaches a certain price. It can be used when selling to limit a loss or—despite the name—to lock in a profit.
A stop-loss order is an order to sell or buy a stock or other investment if it reaches a certain price. When the conditions are met, the stop-loss order becomes a market order—an instruction to buy or sell now at the prevailing market price.
Traders often use this order type as a tool to limit losses on an investment. That might be a floor price on a holding that’s done poorly and an investor is unwilling to risk further losses. This floor price would be set via a sell-stop order.
A stop-loss order could also be used for an investment that has risen in value but that is starting to decline. The order means the investment will be sold once the price falls to a certain point, guaranteeing a profit before it loses more value.
Stop-loss orders also are a tool short sellers—investors who profit when a security falls in price, but lose when it rises— sometimes use. They set a ceiling price that will trigger a sale, thus containing losses.
Stop-loss orders can be placed through a broker or by using an online trading app.
Here’s how a stop-loss order might work. Consider an investor who bought shares of XYZ Corp. at $35 and they’ve now risen to $50. The investor hopes the shares will rise more but doesn’t want to risk a sudden plunge that wipes out the gains. So the investor places a stop-loss order at $45. If shares don’t fall to $45, nothing happens, and the investor can always decide to cancel the order or perhaps set a new stop-loss strategy at a different price. If the shares do fall to $45, the order triggers a market order and the investor sells the stock for a profit of $10 a share.
Although stop-loss orders are a way to sell at a specified price, they do have a downside: If the price never reaches the target, the order won’t be executed. So if an investor wants to be sure a sale takes place, they would place a market order at the current price.
There is one other potential downside to stop-loss orders: The target price isn’t necessarily the price at which the order will be executed. Imagine an investor who sets a stop-loss target at $50 for XYZ Corp. For a brief time, that target is reached, and the stop-loss order becomes a market order to sell shares at current prices. But suppose there isn’t a standing offer in the market to buy at $50 when it comes time to sell. In that case the investor might get less than $50 if the market order is executed at the current market price. Or suppose the share price plummets to $35 in after-hours trading. The investor might get stuck with much less than their preferred trigger price of $50 when the market opens the next day.
One way the investor could have avoided selling for much less than the trigger price would have been to use a limit order along with the stop-loss order, perhaps not allowing a sale below $45. That could have protected them if XYZ’s plunge was temporary, but would also leave them exposed to the possibility that the shares could fall even further.
Stop-loss orders can be used to determine a trigger price to sell an investment. They also can be used by investors that can’t or don’t want to monitor prices regularly to set a price at which they will sell an existing investment.
Stop-loss orders often are used to create an exit strategy that will lock in profit for an investment that has appreciated or to set a lower limit on an investment that has fallen. Investors can combine a stop-loss order with a limit order to create a price range where an investment can be sold.
However, stop-loss orders may not be appropriate in all cases. A long-term investor may be content to hold for years rather than setting up an exit strategy in case the investment falls below a certain point.
A trailing stop-loss order employs a variable price that can be a percentage or dollar amount higher or lower than the current price of the investment in question. This essentially means that if the price moves in a desired direction, the trailing stop price changes—or trails—the price of the investment by the decided-upon amount. But if the investment’s price movement is unfavorable and it declines, the trailing stop price stays the same, and the order will be executed if the investment’s price hits the trailing stop price.
For example, an investor buys XYZ Corp. at $100 a share and it rises to $120. They decide to place a trailing stop order to sell with a trailing stop price $5 below the current price. If XYZ Corp. gains $10 to $130, the investor’s trailing stop price now is $125. If XYZ Corp. starts to fall, the trailing stop price remains $125. The investor’s investment in XYZ Corp. will now be sold if shares fall to or below $125.
Stop-loss orders are used to set a price at which an investment will be sold. They can help investors achieve a variety of goals by setting floor and—in the case of shorting investments—ceiling prices that can limit a loss or lock in a profit.
Stop-loss orders are conditional, and if the conditions aren’t met, the investment won’t be sold. An investor who wanted to make sure that a sale takes place would avoid imposing conditions and instead would use a market order that would be executed at the current market price.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
What Is a Sell-Stop Order? Examples & How To Place One
Sell-stop orders give investors a way to limit losses or take a profit by setting a price below market levels at which their investment will be sold.
Different Types of Stock Orders
Stock investors have the option of using different types of orders. Three main types of trade orders are available: market order, limit order, and stop order.
Stop-Limit Orders: Definition, How They Work and Pros & Cons
Stop-limit orders are used as a strategy for controlling risk when trading financial assets such as stocks, bonds, commodities, and foreign exchange.
What is an All-or-None Order?
AON orders are executed in single transactions and are sold at the same price. It’s difficult to fill an all-or-none order especially in lightly traded penny stocks.
© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at firstname.lastname@example.org. 508 LaGuardia Place NY, NY 10012.