What Is a Stop-Loss Order (Stop Order)
What if the price plunges while you are asleep? A stop order, which you set in advance to 'sell if it falls to here,' eases that worry — but it also comes with traps you might not expect.
What a Stop Order Is
A stop order, commonly called a 'stop-loss,' is a pre-set order that is automatically triggered when the price reaches a preset level (the stop price).
According to the U.S. Securities and Exchange Commission (SEC), the moment the stop price is hit, the order converts to a 'market order.' That is, it sells immediately at whatever price is executable at that moment.
Two points are key. First, the stop price is only the 'trigger,' not the 'execution price.' Second, once triggered, it prioritizes execution regardless of price.
How It Works — An Example
Say you bought a stock at $50 and set a 'stop at $40.'
1. When the price hits $40, the stop is triggered. 2. At that moment it converts to a market sell and executes immediately. 3. But the actual execution price may be not $40 but $39.80, or in a plunging market even $38.
A stop order acts as a 'ceiling to keep losses from growing without limit,' but it is not a tool that sells at exactly that price.
Hidden Risks — Slippage and Whipsaws
There are risks you must know, educationally, about stop orders.
First, slippage. Because it executes at market price after being triggered, in a plunge or a gap-down it can sell far below the stop price. A '$40 stop' executing at $35 really does happen.
Second, whipsaws. If the price briefly touches the stop price and then rebounds right away, you alone can get shaken out at the low and miss the subsequent rise.
A stop is not 'magic that eliminates risk' but 'a rule that manages risk.' If you want to control the price, you also need to understand the stop-limit order in the next article.
This article does not recommend any specific trading timing or stop distance. A stop order is just a tool, and the most important learning point is that the trigger price and the actual execution price can differ.
よくある質問
Q. If I set a stop order, does it sell at exactly that price?
No. The stop price is only the 'trigger' at which the order is activated. Once triggered, it converts to a market order, so especially in a plunging market it can execute below the stop price.
Q. How is a stop order different from a limit order?
A limit order always maintains 'execute only at this price or better.' A stop order waits idle in normal times and only comes alive as a market order once the stop price is hit, immediately attempting execution.
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