Please eli5, would somebody be so kind to explain what a stop loss is to me?
I keep reading and I just go huh. Numbers and economics ive always found confusing. Is a stop loss a point at which if the stock drops you go ok I call it quits and you don’t panic or buy or sell anything after said point? Or is it a point where if said stock drops to a certain point, an automatic function is in place to purchase a set amount of said stock? I don’t know. Any explanation at all would be appreciated!
Edit: Thankyou Thankyou Thankyou for all your replies! I appreciate it and you’ve given me hope that I can learn new things I otherwise would’ve had no idea where to start with
In: 3
A stop loss order is a standing order to sell a security if the price falls below whatever stop you set. i.e. You buy stock ABC for $100/share. You decide you’re not willing to take more than a 20% haircut if things don’t go your way so you put a stop loss order in place at $80. If at any point the stock drops to below $80 then your shares will be sold.
Just a warning, these stop loss orders aren’t perfect. If the stock drops super fast then the shares might sell for less than the stop you set.
Many traders put in a limit-sell order for some price below what they paid to minimize their losses.
Lets say you buy a stock for $100.
You would then set a “stop loss” sell order at $85 to automatically execute if the market price hits $85 or less, minimizing your losses to $15.
This can protect you from massive downside if the stock craters while you’re not paying attention.
It’s not without risk though, sometimes these automatic orders trigger a slide that then sets off *more* automatic orders. This cascades downwards and people accidentally sell their stocks for well below “market” price. The price momentarily dives massively, and then recovers within a few hours once the automated selling is exhausted.
Large funds are sometimes accused of doing this on purpose to “stop loss raid” a stock and buy it for cheap by triggering a cascade.
A stop loss order is an (optional) order put in place by an investor in a stock or other asset. If the price of the stock or asset falls to a certain value then a sell order is automatically placed, reducing the impact to the investor of the fall in price (stopping the loss).
Let’s say you trade a toy with your friend for 10 candy pieces and you hope to trade it back for 12 candy pieces. To make sure you will not lose all of your candy’s worth in the meanwhile, you put a stop-loss by telling your friend to trade it with you for 5 candy pieces in case it loses value reaching the amount of 5 candy pieces. In the meantime, a lot of your friends now have the same toy as you and now you can only trade it for 8 candy pieces. Overtime, the amount of candy you can trade it for continues to become less and less, but just before you can’t trade it for any candy anymore because everyone now has the same toy as you, your stop-loss steps in, it’s your friend you told to take it off your hands for 5 candy pieces before it becomes worthless. Your friend takes it and gives you 5 candy pieces for it. Now you still have at least some candy left instead of none.
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