What is a Stop Loss in Stock Trading?

Stop loss is used to limit the loss in a trade. It can be defined as an order to sell the stock or any asset when it reaches a particular price point. By placing a stop loss, the market participants or investors instruct the broker to sell a security when it reaches a pre-determined price limit.

For example, if investor A wants to place a bid for shares of XYZ company at a certain price point, s(he) would instruct his or her brokerage to set the limit against the stock purchase.

When the share hits the set bid price, the order will be executed automatically to purchase the share.


If you already own the shares of company A and want to offload them, you would ask your broker to sell them when the price reaches a certain high or low. Accordingly, an automatic order will get triggered once the price range matches the set limits.