Stop-loss order

A stop-loss order sits inactive until the share trades at or below the stop price you set. It then becomes a market order and is executed at the next available price. That price is not guaranteed: if the share gaps down, for example opening sharply lower after bad news released overnight, the sale can happen well below the stop level. A variant, the stop-limit order, becomes a limit order instead, which avoids selling below a chosen floor but may not execute at all if the price keeps falling. Some providers of leveraged products offer guaranteed stops, usually for a fee.

Stop-losses can enforce discipline and cap the damage from a single position, which matters most in leveraged trading. They have drawbacks for long-term investors, though. A stop set close to the current price can be triggered by normal day-to-day swings, selling you out just before a recovery and turning a temporary fall into a realised loss. A trailing stop, which moves up as the price rises, can help lock in gains but has the same weakness. And an ordinary stop cannot protect against a price that jumps straight past it, which is often exactly when protection is most wanted.