Stop-Loss Order
A trade order that automatically sells a security once it reaches a specified price, limiting the holder's downside loss.
What is Stop-Loss?
A stop-loss order (also called a stop order) is an instruction to a broker to sell a security automatically when its market price falls to or below a specified trigger price. The purpose is to limit losses: an investor holding a stock at $50 might place a stop-loss at $45, ensuring that if the stock falls 10%, it is automatically sold before further losses can occur. When triggered, a stop-loss becomes a market order, which means execution at the next available price — in fast markets, execution can be significantly below the stop price (slippage). A stop-limit order combines a stop trigger with a limit price to control execution but risks non-execution if the market gaps past the limit.
Example
An investor buys shares of a biotech company at $80, expecting a drug approval catalyst. Concerned about downside risk if the drug is rejected, the investor places a stop-loss at $64, representing a maximum 20% loss. The FDA rejects the drug and the stock opens sharply lower at $55 — the stop-loss triggers at the open but executes at $55 due to slippage, not $64, because the stock gapped down overnight. The investor receives $55 instead of the $64 expected, highlighting the gap-risk limitation of stop-loss orders.
Source: SEC — Types of Orders