Key Terms
Stop-loss order
An instruction that becomes a market order once the price touches a chosen trigger, intended to cap a loss at roughly that level.
By the Investfora Research Desk
A stop-loss order is an instruction that becomes a market order the moment a price touches a chosen trigger level, closing the position at the next available price. Its purpose is to cap a loss without the holder watching the market: while the price stays on the right side of the trigger, nothing happens; once the trigger is touched, the resulting market order executes at whatever the market then offers — which is not necessarily the trigger price itself.
A worked example
Suppose a share is bought at a hypothetical £80 with a stop-loss set at £72. If the price declines steadily through £72, the order triggers and fills near that level, for a loss of roughly £8 per share, or 10 per cent. But if the price gaps overnight from £75 directly to £60, the trigger is passed without the share ever trading at £72, and the order fills at £60 — a loss of £20 per share, two and a half times the intended cap.
A stop-loss fixes the trigger, not the exit price. Gaps and fast markets can carry the fill well past the level chosen, so the loss it caps is approximate, not exact.