What is Stop Loss?
A stop loss is an order placed with a broker to buy or sell a security when it reaches a certain price, designed to limit an investor's loss on a position.
Stop Loss Explained
Stop losses are one of the most fundamental risk management tools in trading. They automatically trigger a sell order when a stock drops to a predetermined price, preventing emotional decision-making during market volatility. Without a stop loss, a small loss can turn into a catastrophic one as traders hope the price will recover.
Real-World Example
You buy 100 shares of AAPL at $180. You set a stop loss at $171 (5% below). If AAPL drops to $171, your shares are automatically sold, limiting your loss to $900 instead of potentially much more.
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