Stop Loss Order

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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.

 

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