A stop-loss order automatically sells — or buys — a stock once it hits a price you choose. Here's how it works, the 3 main types, and when it can work against you.
The price of a stock can change suddenly. These fluctuations could transform a good investment into a poor one — and quickly too. If you haven’t bought your first stock yet, it’s worth reading how to buy stocks online before you dig into this risk-management tool.
To avoid losing too much on your trades, especially in volatile markets, consider a stop-loss order.
What is a stop-loss order?
A stop-loss order is a risk-management tool. When you place one through your brokerage account, your broker automatically buys or sells a stock once it hits a price you specify — sometimes called the trigger price or stop price — closing the trade for you, even if you’re away from your screen.
For example, if you own shares of a stock currently trading at $50, you might place a stop-loss order to sell at $45. Once the share price hits $45, your broker automatically sells your position — capping how much further you can lose if the stock keeps falling.
Types of stop-loss orders
Not all stop-loss orders work the same way. The three most common types are:
Standard (or “hard”) stop-loss
A fixed price you set once. The order sits on your broker’s system and triggers a market sell (or buy) the moment the price is touched. It’s simple and free to place, but it’s vulnerable to slippage in fast-moving markets (more on that below).
Guaranteed stop-loss order
Your broker guarantees you’ll get filled at the exact price you set, even if the market gaps straight through it — the broker absorbs the difference. This removes slippage risk, but brokers typically charge a premium for it, either as a wider spread or a separate fee, which adds to your overall trading cost.
Trailing stop-loss order
Instead of sitting at a fixed price, a trailing stop moves with the market — staying a set distance (in dollars or %) behind the price as it rises, then locking in place if the stock reverses. For example, if you buy a stock at $50 and set a trailing stop 10% below the market price, and the stock climbs to $60, your trailing stop rises with it to $54. It’s useful for letting a winning trade run while still protecting your gains.
Stop-loss orders vs. stop-limit orders
These sound similar but behave differently. A stop-loss order becomes a market order once triggered — it will fill at the next available price, whatever that is. A stop-limit order becomes a limit order once triggered — it will only fill at your specified price or better, which means it could fail to fill at all if the market moves past your limit too quickly. See our full breakdown of market orders vs. limit orders for how these fit alongside stop-loss orders.(1)
Why is a stop-loss order useful?
A stop-loss order is used to limit your losses and take the emotion out of trading. If you buy a stock and place a stop-loss order 10% below your purchase price, the most you can lose on that trade is roughly 10% (before slippage). Many experienced day traders size their stop-loss so that no single trade risks more than 1–2% of their total account balance — that way, a string of losing trades doesn’t wipe out the account.
Stop-loss order example
Here’s an example of using a stop-loss order to protect a short position — a strategy where you borrow and sell shares now, hoping to buy them back later at a lower price.
Say a stock is trading at $50, and you think it’s overvalued. You borrow and sell shares now, hoping to buy them back later at a cheaper price — say, $45.
But what if the company posts surprisingly strong earnings and the stock jumps to $65 instead? You’d owe those borrowed shares back, and buying them at $65 would mean a big loss.
To guard against that, you could place a stop-loss order to buy back the shares at a less extreme level — say, $55. That way, if the trade moves against you, your losses are capped well before they get out of hand.
Where should you place your stop-loss order?
There’s no universal rule, but a few common approaches:
Percentage-based: Set your stop a fixed % below (or above) your entry price, based on how much of your account you’re willing to risk.
Technical levels: Place it just beyond a recent swing high/low or support/resistance level, rather than at a round number. Round numbers and obvious chart levels are where stops tend to cluster, which can make them a target for “stop hunting” — where short sellers or high-frequency traders push a declining stock down further specifically to trigger a wave of stop-loss sales, then buy back in once the price rebounds.
Volatility-based: Give the trade more room in a volatile stock and less room in a calmer one, so normal price noise doesn’t stop you out early.
Compare online stock trading platforms
Compare brokers by available asset types, minimum deposit, stock trade fee and more. Select Go to site to sign up for an account or select View details to read our comprehensive review.
9 of 9 results
What is the Finder Score?
The Finder Score crunches 147 key metrics we collected directly from 18+ brokers and assessed each provider’s performance based on eight different categories, weighing each metric based on the expertise and insights of Finder’s investment experts. We then scored and ranked each provider to determine the best brokerage accounts.
We update our best picks as products change, disappear or emerge in the market. We also regularly review and revise our selections to ensure our best provider lists reflect the most competitive available.
Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money.
Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Are there any drawbacks?
Though a stop-loss order is a useful safety net, it doesn’t always work perfectly in practice. Your stop-loss can be triggered at your chosen price, but you may not actually get that price — instead, your order fills at the next available price. This gap between your intended price and your actual fill is called slippage, and it’s most common during fast-moving markets or overnight gaps, such as after a surprise earnings announcement.(2)
If a stock gaps down well below your stop-loss price overnight, your order will still fill — just at whatever price it opens at, which could be significantly worse than your stop level. A guaranteed stop-loss order (see above) is the main way to eliminate this risk, at the cost of a premium.
What else should I know?
Some traders prefer setting price alerts instead of stop-loss orders. This way, you can decide for yourself what to do next when a level is hit, rather than triggering an automatic buy or sell.
Frequently asked questions
A stop-loss becomes a market order once triggered, so it fills at the next available price. A stop-limit becomes a limit order once triggered, so it only fills at your specified price or better — which means it could fail to fill at all in a fast-moving market.
A standard stop-loss is typically free to place. A guaranteed stop-loss, which protects you from slippage entirely, usually comes with a premium — either a wider spread or a separate fee — charged by your broker.
Your order still executes, but at the next available price after the gap — which could be well below your stop level. This is common after overnight news or an earnings surprise, and it’s the main scenario a guaranteed stop-loss protects against.
Matt Miczulski is an investments editor and market analyst at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on Yahoo Finance, CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
See full bio
Matt's expertise
Matt
has written
285
Finder guides across topics including:
Learn the terminology and how the market works before you begin trading forex.
Advertiser disclosure
Finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which Finder receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. Finder compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
