With trading commissions at zero at most brokerage houses, almost all investors should be using stop losses to protect their portfolios against major market downturns. A stop-loss order is a an order to sell a stock if a certain price point is reached. The stop loss will limit the loss one can sustain during a market downturn. For example, a stop-loss order can be entered to be executed if the stock you are holding drops by 8%. The stop-loss can be thought of as an insurance policy on your stock holding.
The stop-limit order is similar to the regular stop-loss order but goes one step further. One sets a limit/bottom price with the limit order that will trigger a sale. The stop-limit order is helpful when a stock gaps down at the market open, perhaps on bad news overnight. So there is a limit set at which the trade will trigger.
2022 has gotten off to a very bad start for U.S. stocks. The NASDAQ is down 22% thus far this year. Many large technology stocks have fared much worse. The use of stop orders can protect an investor’s gains and should be used in many investment scenarios to avoid major losses that many stocks have seen this year.
