A stop-loss order, also known as a stop order or stop-market order, is a type of order placed by an investor on a stock exchange, such as the London Stock Exchange, to limit potential losses on a stock position. It is a type of order that is used to automatically sell a stock at a specific price (stop price) once the stock has dropped to that price.
When an investor places a stop-loss order, they specify the stop price at which the order will trigger, and the number of shares to be sold. For example, if an investor has purchased a stock for £50 and places a stop-loss order at £45, the order will trigger once the stock falls to £45, and the shares will be automatically sold at the market price, which could be £44.50 or £44.99.
The main goal of a stop-loss order is to limit potential losses in case of an unexpected negative movement in the stock’s price. It allows investors to set a predetermined level of loss, and take the emotion out of decision making, by automating the selling of shares at a certain price. This can be especially useful in volatile markets where prices can change rapidly.
It’s worth noting that while stop-loss orders can help limit potential losses, they also have their limitations, as they don’t guarantee that the shares will be sold at the stop price or better. The order will be executed at the best available price at the time the stop price is reached, and that can be lower or higher than the stop price, in case of a fast-moving market conditions or low liquidity in the stock, this can be referred as “slippage”.
Additionally, stop-loss orders can also be used to protect profits, by setting a stop-loss order at a certain price above the current market price, this is known as a trailing stop-loss order, it can limit the potential loss, but also allows the investor to keep some profits if the stock continues to rise.
Stop-loss orders are a way for investors to limit potential losses on a stock position, by automatically selling shares at a specific price once the stock has dropped to that price. They help investors set a predetermined level of loss, and take the emotion out of decision making, but they don’t guarantee that the shares will be sold at the stop price or better, and also have limitations like slippage. They can also be used to protect profits, by setting a stop-loss order at a certain price above the current market price.
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