Stop Loss Order
A stop-loss order is a type of trading order used when you want to sell a security once it reaches a specific price. This order type helps limit an investor's potential losses on a given stock and differs from a limit order.
When the stock price falls to the designated "stop" price, the order becomes a market order and executes at the next available price. Because it executes at the next available price, a stop-loss order is exposed to price slippage — the difference between the stop price and the actual execution price. In fast-moving or gapping markets, the fill price can be significantly worse than the stop price. Unlike a sell limit order, a stop-loss order will not execute at a higher price than the stop price.
To create a stop-loss order, you need to specify:
- •Number of shares you wish to sell.
- •Stop price — the price at which you no longer want to hold the position.
- •Time in Force — whether the order remains active until canceled or for one day only.
A stop-limit order works similarly but adds a second price — a limit price — which is the worst price you're willing to accept. Once the stop price is reached, the order becomes a limit order rather than a market order. This protects you from negative slippage, because the order will not execute beyond your limit price. The trade-off is that if the market moves past your limit price before the order can fill, it will not execute at all.
To create a stop-limit order, you need to specify:
- •Number of shares you wish to sell.
- •Stop price — the price at which the order is triggered.
- •Limit price — the worst price you're willing to accept.
- •Time in Force — whether the order remains active until canceled or for one day only.
Key difference: A stop-loss order prioritises execution and accepts slippage risk. A stop-limit order prioritises price control and accepts the risk of non-execution.