In trading, a stop loss order is a type of order which allows investors to limit losses by defining a price at which a trading position is automatically closed. Stop loss orders are one of the most common order types and are accepted by most securities brokers.
Stop loss orders are important because they provide investors with a simply way to avoid losing large amounts of capital when the value of their assets (such as shares or commodities) falls sharply or decreases slowly over long periods of time.
Example: An investor buys 100 shares worth CHF 15 per share and selects a stop loss limit of CHF 14 per share. As soon as the price of the shares falls to CHF 14, a market order is triggered and the broker begins to sell those shares at the best available bids to prevent further losses.
It is important to note that a stop loss order does not guarantee that securities will be sold at the specified price. When the rate reaches or falls below the stop loss limit, the order is converted to a market order and the broker sells the shares at the best available offers. If the price falls further before the order can be filled, you may receive less than the amount indicated by your stop loss limit for all or some of your shares.
See also: Stop buy order