What it is:
How it works/Example:
For example, let's assume that you own 100 shares of Company XYZ , for which you have paid $10 per share. You are expecting the to hit $12 sometime in the next month, but you do not want to take a huge loss if the market turns the other way.
You direct yourto set a stop-loss order at $8.50. If the goes up, you realize all of the benefits. If the goes down and touches $8.50, your automatically place a to sell your shares.
It is important tothat when the stop-loss order is triggered, it becomes a . You not necessarily receive $8.50 per share; you most likely receive a little more or a little less.
Why it matters:
Stop-loss orders generally are a trading or short-term investing strategy. They are useful because they help reduce the pressure of monitoring your trade day-to-day; the trade is largely set on autopilot. This can be particularly helpful for emotional investors.
Even though stop-loss orders appreciation that you expected.crucial trading discipline to investors by helping them make important decisions about cutting losses, they also increase the risk of getting out of a position too early -- especially when volatile are involved. In our example, if XYZ was known to be volatile and fluctuated from $8.00 to $12.50 during the one-month forecasting period, then you would miss out on the price
Long-term buy-and-hold investors probably don't want to make substantial use of stop-loss orders. When a goes lower, stop-loss orders lock in losses rather than give you a chance to evaluate whether a slight price decline is actually signaling a buying opportunity.