10: The Essential Rules for Beating the Market

Appendix A. Understanding Stop Loss Orders

First, let's make sure you clearly understand just what a stop loss order is and what it is not:

There are three kinds of stop loss orders:

1. Stop limit. This is an order that says once the stock's market price touches or goes below the stop limit order price, the stop limit order is activated, but not necessarily filled. The broker is required to sell the stock at or above the stop limit order price, if and only if, there is a willing buyer who will pay the limit order price. Should the market price of the stock fall well below the stop limit order price (this is considered a "gap down"), then, although your stop limit order has been activated, it will not fill unless the market price of your stock rebounds back to or above your limit order price. Once the market price of your stock has plummeted below your limit order stop loss price, it could continue to move lower (even to zero) and your limit stop loss order will never fill. I do not recommend using stop limit orders.

2. Stop market. This type of stop loss order is known by various names, such as "stop," "stop loss," and "stop market." This is an order that says once the stock's market price touches or goes below the stop market order price, the stop market order is activated and filled as soon as there is a willing buyer (market), regardless of price. On the surface, this may sound very disconcerting. It is quite the contrary. If a stock is going to trigger your stop loss price, even if it ...