STOP LOSS ORDER Meaning and
Definition
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A stop loss order is a type of order placed by an investor or trader to protect against potential losses in a financial investment. It is a predetermined instruction to automatically sell a security if its price reaches a certain level, known as the "stop price." The primary purpose of a stop loss order is to limit potential losses by allowing for an automatic exit from a position before the value of the asset significantly decreases.
When placing a stop loss order, the investor sets a stop price below the current market price in the case of a long position or above it in the case of a short position. If the security's price reaches or falls below the stop price, the stop loss order is triggered, and the broker executes a market order to sell the security. This ensures that the investment will be sold at or near the stop price.
Stop loss orders are commonly used in volatile markets or for high-risk investments to manage risk. They provide a proactive approach to risk management and can help investors maintain discipline and prevent emotional decision-making during times of market turbulence. While stop loss orders do not guarantee protection against losses, they act as a safety net to limit potential downside and preserve capital. It is essential to consider the volatility and liquidity of the investment when determining the stop price, as well as the individual's risk tolerance and investment objectives.
