Stop-Loss Order
An order that automatically sells a security when its price falls to a specified level, designed to limit an investor's loss on a position.
What is Stop-Loss Order?
A stop-loss order is an instruction to sell a security automatically if its price drops to or below a specified trigger price, called the stop price. Once the stop price is reached, the stop-loss converts into a market order and executes at the next available price. Stop-loss orders are a risk management tool that allows investors to define their maximum acceptable loss on a position without monitoring the market continuously. A related variant, the stop-limit order, converts into a limit order rather than a market order when triggered, providing price protection but risking non-execution if the price falls too quickly. Stop-losses do not guarantee execution at the stop price — in fast markets or after a gap down, the fill price can be substantially worse.
Example
An investor buys Tesla at $250 per share and places a stop-loss order at $225 — 10% below the purchase price. If Tesla falls to $225, the stop triggers and the order converts to a market sell, limiting the loss to roughly 10%. Without the stop, the investor might hold through a deeper decline, allowing a small manageable loss to become catastrophic. However, if Tesla gaps down overnight to $200, the stop would execute near $200, not $225.
Source: Investopedia — Stop-Loss Order