How does a stop loss work?

w00519773

I am an investor who believes in fundamental analysis principles.  I like to analyse a company and look at its long term prospects using techniques I learnt about at university.
However, I am always intrigued by technical analysis and short term gains.  For example, say I placed an order of 1,000 shares for £5 and placed a stop loss of £5.50.  Does this mean that if a random person places an order for £5.50 (and then cancels it - before it is executed), then my stop loss is triggered and I "lose"? Or does the purchase have to be executed before the stop loss is triggered.
Please don't say this is risky as I understand it is!!! I am a fundamental investor just trying to understand how the over side works!

Username999

If you Bought at £5 then you wouldn't place a Stop Loss at £5.50.
If you wanted to limit losses to 50 pence then you'd place your Stop Loss at £4.50.
(or are you Short?)

w00519773

Username999 said:

If you Bought at £5 then you wouldn't place a Stop Loss at £5.50.
If you wanted to limit losses to 50 pence then you'd place your Stop Loss at £4.50.
(or are you Short?)

Thanks.  Long or short - it does not matter.  I am short in my example.

k6chris

If you bought a share at £5.00 you could place a stop loss (to limit your losses) at say £4.50.  This does NOT mean the most you can lose is 50p, it means that when the share price trades at £4.50 or below, you share will be sold at the market price when the sale transaction goes through.  This might be £4.50 in a very liquid market with lots of volume, or could be a lot less if the price is moving quickly down or there are not many buyers or your broker is useless or......  

w00519773

k6chris said:

If you bought a share at £5.00 you could place a stop loss (to limit your losses) at say £4.50.  This does NOT mean the most you can lose is 50p, it means that when the share price trades at £4.50 or below, you share will be sold at the market price when the sale transaction goes through.  This might be £4.50 in a very liquid market with lots of volume, or could be a lot less if the price is moving quickly down or there are not many buyers or your broker is useless or......  

Thanks.  I understand that there is no guarantees that your stop loss order will be executed at the exact price you specify.

I am trying to understand when the stop loss is triggered.  Is t when a share is actually sold at the stop loss price or when some random person places a market order or limit order at the stop loss price?

k6chris

It is when you brokers bid price is at or below the stop loss.  With larger spreads, the mid price or ask price may never get as low as your stop loss.

viewcart

1. You won't always get your stop loss price. Sometimes the price drops so fast your order is not executing in time.

2. You are wide open to flash crashes. Some times stock drop rapidly for no reason and then recover in a split second. You will lose big if that happens.

I don't believe in Stop Loss. If you buy solid companies you don't need to worry about Stop Loss. Buy penny stocks? Then you are at the mercy of Stop loss.

Thrugelmir

w00519773 said:

k6chris said:

If you bought a share at £5.00 you could place a stop loss (to limit your losses) at say £4.50.  This does NOT mean the most you can lose is 50p, it means that when the share price trades at £4.50 or below, you share will be sold at the market price when the sale transaction goes through.  This might be £4.50 in a very liquid market with lots of volume, or could be a lot less if the price is moving quickly down or there are not many buyers or your broker is useless or......  

I am trying to understand when the stop loss is triggered.  Is t when a share is actually sold at the stop loss price or when some random person places a market order or limit order at the stop loss price?

Be when a market maker prices the stock at that level.

wmb194

w00519773 said:

k6chris said:

If you bought a share at £5.00 you could place a stop loss (to limit your losses) at say £4.50.  This does NOT mean the most you can lose is 50p, it means that when the share price trades at £4.50 or below, you share will be sold at the market price when the sale transaction goes through.  This might be £4.50 in a very liquid market with lots of volume, or could be a lot less if the price is moving quickly down or there are not many buyers or your broker is useless or......  

Thanks.  I understand that there is no guarantees that your stop loss order will be executed at the exact price you specify.

I am trying to understand when the stop loss is triggered.  Is t when a share is actually sold at the stop loss price or when some random person places a market order or limit order at the stop loss price?

How it usually works is that it will be triggered when the *indicated* bid price on the LSE is at or below your set price and then your broker will sell at whatever the best price it can get for you. Your stockbroker's help section should give you details of all of the different types of orders it offers and how it executes them.

w00519773

What happens if the stop loss (£5.50) is reached but the broker is unable to trade at that price - perhaps because of timings i.e. within a fraction of a second the price goes back to something less than £5.50.  Are you still "in the game" until the stop loss is triggered again or does the broker do its best to trade once the stop loss is triggered for the first time?

wmb194

As I wrote earlier, it will trigger and then be traded at the best price the broker can find. It might be higher, lower or at the price of the stop loss.