Stop-Loss Order

A stop-loss order is an instruction you set with your brokerage to automatically sell an investment if it falls to a specific price. If you buy a stock at $100 and set a stop-loss at $85, your shares will be sold if the price hits $85. The idea is to cap how much you can lose on a position without needing to watch it constantly.

Why it matters

Stop-loss orders sound like a safety net, and in some situations they can be. If you own an individual stock and want protection against a major drop, setting a stop-loss gives you an automatic exit.

But there are some important catches. When a stop-loss triggers, it becomes a market order, meaning it sells at whatever the next available price is. During a sudden crash or a gap down overnight, your shares might sell well below your stop price. You set a stop at $85, but if the stock opens at $75 the next morning, that’s what you get.

Stop-loss orders can also work against you during normal volatility. Stocks bounce around. A temporary dip to $84 might trigger your stop-loss and sell your shares right before the stock recovers to $110. You’ve locked in a loss on a position that would have been fine if you’d held on. This is especially frustrating during the kind of short-term drops that feel scary in the moment but recover quickly.

Example

You buy 200 shares of a Canadian bank stock at $65 each and set a stop-loss at $58. A few weeks later, the stock dips to $57.50 during a broad market selloff, triggering your stop-loss. Your shares sell at $57.50, locking in a $1,500 loss. The stock recovers to $70 within a month. Without the stop-loss, you’d be sitting on a $1,000 gain instead.

For long-term investors holding diversified ETFs, stop-loss orders are rarely useful. They’re more suited to active traders managing individual stock positions with shorter time horizons.