What is a Stop Loss order?

Superhero investors can now use ‘stop loss’ orders to limit losses and minimise their downside risk.

Let’s dive in now to discover what they do, and how investors can make the most of them.

What is a stop loss order and how do they work?

Stop loss orders are most commonly used by investors to assist in limiting downside risk in the event of a market selloff. By implementing a stop loss order what investors are really doing is instructing their broker (such as Superhero) to sell their shares if the price falls to or below a certain level, called a ‘trigger price’.

Let’s say for example that you bought a company at $10 per share and the share price rises to $20 in the weeks that follow. You’re chuffed but you also don’t want to miss out on your gains should the share price revert to $10.

What do you do? Well you could implement a stop-loss order to automatically sell your shares should the price fall below $15 for example. If this happened, you could take a profit on your shares which would begin selling off at $15 to the highest bidder. 

It’s important to note that stop loss orders mean you’re selling into the market at whatever price buyers are willing to pay, also known as a ‘market sell order’. This means you might set a $15 trigger price but that your shares could sell for less than that. In other words, you don’t know exactly how much you’ll receive when you set a stop loss order. 

Similarly, if the share price falls below your trigger price briefly before jumping above it again, you could end up with a partially filled sell order. This means some but not all of your shares have been sold.

The benefits and risks 

Stop losses are useful for getting out of an investment position quickly at or below a specified price should your shares drop. The tradeoff is that investors may receive a much lower price for their shares than the order price they set.

How long does a stop order last?

With Superhero, these types of orders remain pending until the trigger price is reached. You can of course edit or delete any outstanding orders at any time should you change your mind. You can access these from your Dashboard under the ‘Pending’ tab. 

A stop loss order may also be terminated under certain circumstances such as some corporate actions (eg. a security going ex-dividend) or if the stop loss order doesn’t execute within 6-months of being placed.

When are stop loss orders commonly used?

Whether you choose to use a stop loss order really depends on the kind of shares you’re holding, the volatility of the share price, your risk tolerance and your investment strategy.

How do I set a stop loss order with Superhero?

1. Choose a holding from your portfolio, select sell and set ‘Order Type’ to ‘stop loss order’.
2. Set the trigger price. This is the price at or below which your shares or ETF units will begin to sell.
3. Choose the number of units you would want to sell in case the price falls to or below the trigger.
4. Tap ‘Review’ and check the details of your new stop loss order. 
5. If you’re happy with it, submit it. You can always edit or delete the order later from your dashboard under the ‘Pending’ tab.

How do I change/cancel my stop loss order/s?

If you wish to change or cancel your stop loss order, log into your Superhero account and click on the ‘Dashboard’ tab followed by ‘Pending’.

There you can then easily cancel an old stop loss order and, if you like, create a new one to replace it. 

Superhero does not provide financial advice that considers your personal objectives, financial situation or particular needs. Any advice provided is intended to be of a general nature only.

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