What's a stop-loss order?
Unlike limit sell orders, where you attempt to sell shares at a higher share price, stop-loss orders enable you to sell shares at a lower share price. Yes, this is the opposite of what investors usually try to do; however, their goal is in the name: you use them to try to stop or reduce your losses.
Stop-losses are controversial, and they can backfire. Many long-term investors never use them, however they do play a role in some short-term strategies, or when you think an investment may turn to custard.
How do they work?
When you make a stop-loss order, it’ll turn into a market order as soon as the share price hits the one you entered. That means that you may not get the price you want, you’ll just get the best available price once your stop-loss order is triggered and your order is placed. For example:
- Company X has a current share price of $150
- You think some bad news overnight will cause the share price to drop, so you place a stop-loss order for $130 a share
- If the share price does drop to $130, your stop-loss order will become a market order, and it’ll be matched with the best available buy order to sell your shares. Note: The share price may bypass $130 altogether, and you’ll sell your shares for $129, $120, or whatever the price is once it drops below the $130 share price you set
Note: With Hatch, you're only allowed to have one pending sell order for each share you own (i.e if you own 1 Apple share, you can only have one pending order to sell that 1 Apple share).
Stop-loss orders feel a little overwhelming?
If you’re wondering if this whole investing thing is just too hard and maybe not your vibe, watch this 5 minute video - we explain how you can ignore all the complex and technical Wolf of Wall Street-esque tricks of the trade and focus on one simple rule when you invest: Don’t trade stocks, buy businesses. If it’s good enough for Warren Buffet, it’s probably good enough for you.