Stop Loss Orders Explained: How to Protect Your Investments from Big Losses
- Susan Geist
- Oct 3
- 2 min read
Caitlin and I generally encourage setting up a buy-and-hold portfolio of diversified low-cost index funds. And yes, sometimes this can often seem ‘boring’. So what do you do if you want the excitement of investing a small amount of your money in riskier stocks, such as start-ups, but don’t have the risk tolerance to lose it all? This is where stop loss orders come in.
A stop loss is an automatic sell order you can set on a stock through your brokerage. You choose a price point - say, 20% below what you paid - and if the stock falls to that level, your brokerage sells it for you. The idea is to limit your downside without having to watch the market every day. It’s easy to set up in most brokerage accounts: just look for the “sell” order type and select stop loss instead of market or limit.
Now you typically don’t want to use these for diversified index funds or companies that you believe in for the long haul, because stocks can often dip and bounce back immediately after. How sad would you be if you bought a stock for $10,000, had a 20% stop loss sale trigger, then the stock immediately jumps back up to the original price a few hours later? You’d be left with only $8000 of your original investment and no stock. 😭
That’s the problem with stop losses for long-term investments. Markets don’t move in straight lines. They dip, they pop, they recover. If you’re investing in index funds or companies you believe in, stop losses usually hurt more than they help.
BUT – there are times when they make sense. If you’re dabbling in risky plays like a speculative biotech or a small startup, you may decide you only want to risk so much. In that case, a stop loss can help you draw your line in the sand.
Take Rivian, for example. The electric truck startup hit a high around $130 per share and has since fallen to under $15. That’s an 85% wipeout. Firefly Aerospace is another recent case; it reached a high over $70 shortly after its recent IPO, but now has dropped to around $28/share. For someone who bought into the hype early, a stop loss could have been the difference between taking a manageable loss and watching their investment mostly disappear.
Most of my portfolio sits in diversified index funds, so I rarely use stop losses. But for the handful of speculative investments I own - where the risk runs a bit higher - a stop loss gives me a way to hedge against major losses. Think of it as just one more tool in your investor toolbox, there to pull out when the situation calls for it. 🔧
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