Stop-Loss Order
A stop-loss order automatically sells a security once its price falls to a set level, aiming to limit losses on a position.
A stop-loss order, also called a stop order, sits inactive until the stock hits a price you choose, called the stop price. Once that price is reached, the order turns into a market order and is executed at the next available price. Its purpose is to cap losses without having to watch the market all day.
The key point is that a stop-loss does not guarantee the stop price. If a stock falls sharply or opens much lower after bad overnight news, a so-called gap down, the order may be filled well below the stop price. Investors who want price control can use a stop-limit order instead, which brings its own risk of not being filled.
Stop orders can also be used to buy. A buy stop is placed above the current price and is sometimes used to limit losses on a short position.
Example: you buy a stock at $80 and place a stop-loss at $72. If the price drops to $72, a market sell order is triggered. In a calm market you might sell near $72, but after a sudden drop to $65 at the open, you would sell closer to $65.