What is a Hard Stop?
A hard stop is a standing instruction from a brokerage client to sell units of a security if the market price declines to a specific level. It is a generic term that can refer to both a stop-loss order or a stop order.
How Does a Hard Stop Work?
Securities may experience volatile price fluctuations that exacerbate their levels of risk. Traders and investors place hard stops on specific portfolio holdings in an effort to minimize losses.
For example, suppose Bob wishes to sell off his 100 shares of stock ABC if they reach $50 per share. Bob places a hard stop on these hundred shares by instructing his brokerage house to automatically sell all 100 shares if their price in the stock market falls to $50 per share.
Why Does a Hard Stop Matter?
A hard stop minimizes losses only if a security's market value experiences a sustained decline. A hard stop can result in lost gains if a security’s market price experiences a recovery subsequent to reaching the hard stop price.