1. A stop loss order is an order placed with a broker to buy or sell a specific stock once it reaches a specified price.
2. A stop loss is designed to limit an investor’s loss on a security position.
3. If an intra-day buyer hopes to sell at a profit and close his position before the end of the day but the price goes down, then the stop loss gets triggered and closes the position, thereby limiting the loss.
4. The advantage of stop loss is that investors do not have to continuously monitor their holdings and there is no additional cost to set the stop loss order.
5. The disadvantage is that a short-term fluctuation in a stock’s price can activate the stop price and trigger the transaction.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)