What Is A Stop-Loss Order?

A stop-loss order is an order to sell a security when it reaches a certain price in order to limit an investor's loss or risk exposure.

There are different tools that you can use to manage your portfolio and one of them is a stop-loss order. As the name implies, the essence of a stop-loss order is to stop or limit your losses and it is as simple as an investor calling his broker to stop the loss or potential loss on a particular share/ stock.

A stop-loss order is an order to sell a security when it reaches a certain price in order to limit an investor's loss or risk exposure.

For example, where an investor purchases a stock at N50 per share, he might enter into a stop-loss order to sell off his shares if the price ever gets as low as N30 per share. When it does get that low, your shares are automatically sold at the prevailing market price.

Stop losses protect you against falling share prices. Stop losses are great because they are there to limit your losses as an investor. A great advantage of using a stop-loss order is you no longer have to monitor your holdings consistently.

They can also be really helpful where there is a sudden negative price movement that would only get worse.

There are different kinds of stops you can use or methods by which you employ the stop-loss order. A hard stop allows you trigger the sale of a stock at a fixed price.

Here, the investor places an automatic order with his broker or agent to sell his stocks when the prices gets to a fixed price that doesn't change.

The other way round is that the investor sets a certain percentage that the share prices must not go below. This type of stop loss order called a “trailing stop” and it is used to lock in profits.

A trailing stop allows you to get at least some capital gain. With a trailing stop-loss order, the stop-loss price is not set at a single, absolute amount but it is set at a percentage level below the current market price.

You can use stop-loss orders short-term trading as well as long-term trading. One disadvantage is that a normal short-term price fluctuation might activate the stop order and lead you to make an unnecessary sale.

For this, it is important that the benchmark has a good range to make room for price volatility in order to ensure that you don’t pull out your funds in situations of temporary market fluctuations. It is also better to use the order over the longer term.

Generally, a stop-loss order is a contingency tool that mitigates your risks. Just like an insurance policy, it can protect you from unwanted losses and increase your profits.

Written by Lawretta Egba.