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What is Stop-Loss Order?

A stop-loss order is appended to a securities position being held long or short, and stipulates that the security is to be sold or bought if the price moves beyond the stop price, at which point the investor seeks to "cut his losses," or limit his potential exposure to losses.

A stop-loss order will name a price below the market price on a long position and above the market price on a short position, at which point a sell order will be triggered for the long position and a buy order will be triggered to cover the short position, with the goal being to limit the potential losses to which an investor is exposed.

An investor might put a sell-stop on a long position at a price which marks the most losses an investor is willing to take on that position. The price might decline so sharply after the order is entered that even more losses might be taken by the time the transaction occurs, however, which is an unfortunate risk that investors may try to hedge against by putting a limit on the order.

With a limit on the order, the investor might effectively wait out a severe downturn by letting prices get back above a limit price, which is still below the stop price. A stop-loss itself does not have a limit built into it.

What is a Stop Order?
What is a Stop Limit Order?

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