A stop-loss order is activated as a market order after the stop level has been hit or exceeded. It is executed on the first and best next price or prices. With this order type, you can protect your position against a (further) price drop. You could also profit from a price breakout instead.
Example phrase: 'I used a stop-loss order to limit my losses to 10%. I had a hunch the price would drop after the news came out.'
Why use a Stop loss order?
With this order type, you protect your position against a (further) price drop or you can profit from a price breakout. You can also choose to specify a limit price, then we are talking about a stop-limit order.
Example when selling with a stop loss
Suppose you want to sell a certain share if it reaches a value of € 10, you can indicate this using this method. As soon as the price falls to € 10, shares are sold. This can be for the amount of € 10, – but can also be for an amount of € 10.02. This depends on the speed at which the price fluctuates. But it will significantly limit your losses in a situation where the fall may have continued to €6 in the intraday.
Example when buying with a limit
If you want to add a share to your portfolio, you can do this by means of a limit order. If the share reaches the stop level entered by you of, for example, € 25, these will be bought for you. This does not mean that they are exactly € 25,-. They can also be slightly more expensive or cheaper depending on the price fluctuation at the time. However, it will significantly make your life easier if you believe a share to be at fair value at €25, without having to monitor its price development.
Disadvantages of stop loss orders
It is possible that the price of a share continues to rise, but it can of course also be that it falls further. By using a stop-loss order you limit both the possible profit and loss.