Close this search box.

Table of Contents

Stop-Loss Order


A stop-loss order is a type of advanced trade directive used by traders to limit potential losses on an investment. It orders an asset to be sold once it reaches a predetermined price point known as the ‘stop price’. This is designed to prevent substantial losses if the market moves unfavorably for an investor.


The phonetics of the keyword “Stop-Loss Order” is: /stɒp lɔːs ˈɔːrdər/

Key Takeaways

  1. Control Over Losses: A stop-loss order gives an investor control over potential losses in their investments. It automatically sells the security when it reaches a certain price. This way, the investor can limit their maximum possible loss on a given investment.
  2. No Direct Supervision Needed: Once you’ve set a stop-loss order, it doesn’t require direct supervision. The trade will be executed when the stop price is reached, regardless of whether you’re monitoring your investments closely or not. This can be beneficial for people who can’t keep a constant eye on market trends.
  3. Risk of Execution: While stop-loss orders are meant to protect from severe market downturns, there is a risk associated with it. If the market is moving swiftly, your stop-loss order might be executed at a markedly lower (or higher, in case of short positions) price than your stop price. This is known as slippage and represents a risk for stop-loss orders.


A stop-loss order is crucial in business and finance as it allows investors to limit their potential losses when trading in volatile markets. By predetermining the price at which a particular security will be bought or sold, it automatically triggers a trade when the security hits that set price level, effectively enabling an investor to cap their losses. The predetermined price is typically set below the purchase price for a buy order, or above it for a sell order. This makes it an important risk-management tool, particularly in turbulent market conditions. Additionally, it can also free up time for an investor, replacing the need to constantly monitor the market, while offering some measure of emotional detachment from the trading process because decisions are made in advance.


The primary purpose of a stop-loss order in financial trading is to limit an investor’s loss on a security position. It is a tool used by traders to prevent significant losses if the market moves unfavorably. Such an order sets a particular price at which a given stock, forex, or another financial instrument is automatically sold, effectively stopping further losses. This automatic sale triggers when the financial instrument hits the set price point, which is known as the stop price. A stop-loss order is especially useful during volatile market conditions when rapid price changes can occur within a short time. It is used to protect gains, lock-in profits, or limit losses on a security, and it takes away the need for the investor to monitor their holdings continuously. It offers a kind of insurance for the investor’s holdings and allows for greater control over potential losses, which is crucial to a successful, strategic trade execution. Ultimately, a stop-loss order is a critical component of risk management in trading.


1. Stock Market Investing: A retail investor owns shares of company XYZ, purchased at $50 each. To mitigate risk, they set a stop-loss order at $45. This means that if the share price drops to $45, their shares will automatically be sold, preventing further loss.2. Forex Trading: Assume John is a forex trader who has bought EUR/USD at 1.2100, and places a stop-loss order at 1.2050. If the pair drops to this level, his trading platform will automatically sell at the next available price, limiting his losses.3. Cryptocurrency Trading: Alice buys Bitcoin at a price of $45,000. Given the high volatility of cryptocurrencies, she sets a stop-loss order at $40,000 to protect her capital. If the price of Bitcoin drops to $40,000, her Bitcoin will be sold automatically to prevent additional loss.

Frequently Asked Questions(FAQ)

What is a stop-loss order?

A stop-loss order is a type of advanced trade directive that specifies a certain price at which your trade will be executed. This is primarily used to limit potential losses or lock in profits on a stock, forex, or other trade.

How does a stop-loss order work?

When a stop-loss order is set, the broker will execute a sale when the value of the asset reaches the specified stop price. It can be viewed as a type of insurance policy on an investment, protecting the investor from sudden and significant financial losses.

Why is a stop-loss order important?

Stop loss orders are important because they provide an automatic mechanism for protecting an investor’s assets without constant market monitoring. It allows for peace of mind and potential risk reduction.

Can a stop-loss order ensure a specific share price when executing a sale?

No, a stop-loss order converts into a market order once the stop price is reached. Therefore, the final sale price might be lower or higher than the stop price, depending on the market conditions.

Are stop-loss orders always successful in preventing losses?

Not always. Though stop-loss orders are designed to limit losses, they don’t guarantee you’ll escape all losses especially in rapidly declining markets. As they turn into market orders once the stop price has been reached, they might end up being executed at significantly lower prices during such situations.

How long do stop-loss orders last?

A stop-loss order could remain active until the investor chooses to cancel it or the trade is executed. Some brokers may put constraints on how long a stop-loss order can remain open. It’s best to check with your broker for their rules on duration.

Can I use a stop-loss order in all types of markets?

Yes, stop-loss orders can be used in most types of markets including equities, commodities, forex, etc. However, the specific rules and restrictions for stop-loss orders may vary from one market to another. Always check with your broker or exchange for specifics.

Related Finance Terms

Sources for More Information

About Our Editorial Process

At Due, we are dedicated to providing simple money and retirement advice that can make a big impact in your life. Our team closely follows market shifts and deeply understands how to build REAL wealth. All of our articles undergo thorough editing and review by financial experts, ensuring you get reliable and credible money advice.

We partner with leading publications, such as Nasdaq, The Globe and Mail, Entrepreneur, and more, to provide insights on retirement, current markets, and more.

We also host a financial glossary of over 7000 money/investing terms to help you learn more about how to take control of your finances.

View our editorial process

About Our Journalists

Our journalists are not just trusted, certified financial advisers. They are experienced and leading influencers in the financial realm, trusted by millions to provide advice about money. We handpick the best of the best, so you get advice from real experts. Our goal is to educate and inform, NOT to be a ‘stock-picker’ or ‘market-caller.’ 

Why listen to what we have to say?

While Due does not know how to predict the market in the short-term, our team of experts DOES know how you can make smart financial decisions to plan for retirement in the long-term.

View our expert review board

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More