investing guide

Stop-Loss Order

stop loss order

There are different ways to use a stop order, but the most important one is the stop-loss sell order for a stock going down in price.

This is the most important thing a new investor should learn in order not to lose his or her shirt right off the bat. A stop-loss sell order basically tells your online broker to automatically sell a stock when the price is coming down to a level that you feel is to much to lose. You alone as the investor will decide your risk/reward tolerance.

The reason this is important is because if a stock just nose dives because of a bad news day you could lose a lot of money quickly, if you do not have a stop-loss order in place. You can also use a trailing stop order to accomplish the same thing it just depends on your preference. Some people like to wait until a stock is going up before using a trailing stop order so they do not get "stopped out" of a stock to early in an upswing. So they start with a stop order, and then they switch over to a trailing stop when the price really starts rising in order to lock in their profits.

It is important to learn how much stocks go up and down in price throughout the day to better understand where to place stop orders, or you may end up putting them to close to the current price. This will frustrate you when a stock gets automatically sold, but the price ends up going much higher.