What is a stop-loss order, and should I use one?

A stop-loss is a standing instruction to your broker: if this stock drops to a certain price, sell it. Buy a stock at $100, set a stop at $85, and if it ever trades at $85 the order triggers and sells at the next available price. The idea is to cap how much you can lose without having to watch the screen.

It is a trader’s tool, and for a trader it makes sense. Someone holding a stock for a few days on a specific bet wants a defined exit if the bet goes wrong. The stop enforces discipline that people often lack in the moment.

For a long-term investor it usually backfires. Stocks routinely fall 15 percent on nothing and recover; a stop turns that ordinary swing into a real loss and leaves you out of the position when it bounces. Worse, in a fast drop the stop sells at whatever price is available, which can be well below your trigger. Plenty of people got stopped out at the very bottom in March 2020.

If you want protection on a long-term holding, position sizing does the same job with fewer side effects: keep any one stock small enough that a bad outcome is survivable, and you will not need an automatic ejector seat.