When you buy a stock, the goal is to have it go up in value and produce a profit for your brokerage account. However, it can be a prudent strategy to set a price to sell below the purchase price, so if the stock goes down instead of up, your losses are limited. The aptly named stop-loss order accomplishes this purpose.
After purchasing stock, you can use a stop-loss order to specify a stop price at which you want to sell the stock. You can also manually track the stock's price and sell it when the price reaches what you're looking for.
Buying Your Stock
To buy shares of stock at the current market price, use your online brokerage account trading screen to place a market order. You enter the stock symbol and number of shares you want to buy, execute or send the order, and you will quickly – most often in a couple of seconds – own the shares at the currently trading price. You may want to enter market orders to buy stock only when the stock exchanges are open: 9:30 a.m. to 4:00 p.m. eastern time, Monday through Friday, because prices can shift due to after-hours trading.
Set a Stop-Loss Order
After buying the shares, enter a stop-loss order to sell the shares at a price you select. Use the stock order screen to again enter the stock symbol and number of shares and then select stop-loss as the order type. Your brokerage account may use the term stop order, meaning the same as stop-loss.
The order screen will require your stop price, which must be lower than the current share price. You also must select a time frame for the order from the options of day-only or good-till-canceled – GTC. In most cases, you want your stop-loss orders to be GTC.
Stop Order Considerations
A stop-loss order converts to a market order when the market price touches your selected stop price. The actual price at which you sell the shares may be different from your stop price. If the stock is falling quickly, your stop may be completed at a much lower price than you planned.
As an alternative, another type of order – called a stop-limit order – will only be completed at the selected stop price. The problem with a stop-limit is that a rapidly falling stock price may move through the stop-limit price, and the order never gets completed. A stop-loss order is assured to be filled, but at an unknown price. A stop-limit order will be completed at the price you choose, but may not work if the share price falls too fast.
Adjust Your Stop Prices
When the stock you buy goes up in value as expected, you can adjust the price of your stop-loss order. After the stock makes a nice move up, your stop-loss order with a higher stop price becomes a take-profits order – although it will still be called a stop-loss. Some brokerage firms allow you to set a trailing stop where the stop price automatically moves up if the stock goes higher and stops moving when the stock turns downward.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.