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A stop-loss is a risk management order placed by an investor or trader to limit potential losses on an investment, particularly in the stock market or other financial markets. It is an order that is executed automatically when the price of an asset reaches a specified level, known as the “stop price” or “stop level.” The primary purpose of a stop-loss order is to protect an investor from significant losses in a declining market by triggering the sale of an asset when its price falls to a predetermined point.

Here are some key points about stop-loss orders:

1. Setting a Stop Price: When placing a stop-loss order, an investor specifies the stop price at which they want the order to be triggered. If the market price reaches or falls below this stop price, the order is activated.
2. Market Order: A stop-loss order typically becomes a market order once the stop price is reached. This means that the order will be executed at the best available market price after the stop price is hit. Market orders may not necessarily execute at the exact stop price if market conditions are volatile.
3. Risk Management: Stop-loss orders are a crucial tool for risk management. They help investors limit potential losses by selling an asset before its price falls too far. This can be especially important in volatile markets.
4. Types of Stop-Loss Orders: There are different types of stop-loss orders, including trailing stop-loss orders, which adjust the stop price based on the asset’s price movement, and stop-limit orders, which allow investors to set both a stop price and a limit price to control the execution price.
5. Volatility Consideration: In highly volatile markets, prices can fluctuate rapidly. As a result, a stop-loss order may not execute at the expected price during extreme market conditions. This is known as “slippage.”
6. Use in Different Markets: Stop-loss orders are not limited to stock markets; they can also be used in other financial markets like forex, commodities, and cryptocurrencies.

Investors should carefully consider their risk tolerance and investment strategy when using stop-loss orders. While they can help protect against significant losses, they can also lead to selling assets prematurely if the market experiences short-term fluctuations. It’s essential to strike a balance between risk management and allowing investments to grow over time.