A stop-loss order is essentially a part of the risk management system which helps traders to manage risk. An order is placed with a specific trigger price given by an investor to his broker if the trade goes against the trader and price hits the specific trigger price set by the trader an automatic order will be executed on behalf of the trader. Such orders are designed to minimize the loss of an investor.
Let’s understand the concept with an example.
Let’s say an investor owns 100 shares in X company. The price of a single share is $50. After some time, the price of each share comes down to $48. Now the investor is not sure if the prices will come down or move up so, he uses the Stop-Loss order. He puts the Stop-Loss at $47, now by doing this; his position will close automatically when the price of the share reaches $47. This allows him to limit his losses and secure his investments.