NOTE: FOR EDUCATION ONLY
A stop-loss order is an order placed with a broker to sell a security when it reaches a certain price. Stop-loss orders are designed to limit an investor’s loss on a position in a security.
- Sam enters a stop loss order in his computer.
Example: Sam bought 100 shares of XYZ Corp. at $20 per share plus a $10 purchase commission. He spent $2,010. The share price increased to $30, 18 months later, when Sam entered a stop loss order at $28. He adjusted the order to $29 two months later, when the share price was $31. If the stock price continues to increase the order is never executed, but if the share price declines to $29 a sell order is automatically executed. The share price decline to $29, two ears after the purchase. If the sales commission is $10 per order, Sam collects 2,890, [ 2,890 – $2,010 = $ 880 ] with $880 gain subject to long term capital gains. The investor had an annual return about 22% before tax.