Sometimes called "stop orders." A method of limiting one's losses, particularly in dealing in stock exchange securities; for example, suppose A owns 100 shares of a certain stock costing $90 per share. He anticipates and hopes that it will advance in price, at the same time, the market conditions are such that it is possible a sudden decline may take place. Being willing to hold the stock, in case of a small drop, with the expectation that it may shortly recover, but not wishing to hold the stock for a great decline, say to below 80, a "stop loss order" is given by A to his broker. This means that if the stock declines to a point where its sale takes place at 80, or even if the last sale is above this figure, and a broker offers some of the same stock for sale at 80, the "stop loss order" goes into effect, and the broker holding the same must not wait for a bid, but offer the customer's stock at, say, 794, and so on down until a purchaser is obtained. In other words, when the "stop loss order" goes into effect it means that a sale will be made at the best price obtainable at the time. In practice, of course, brokers use their judgment as to "offering it down" but a sale must be effected at some price. "Stop loss orders" in inactive stocks are dangerous. The cautious speculator uses such a safeguard only in regard to securities that are frequently traded in, and almost continually quoted.
The expression is often used that many "stop loss orders were uncovered," meaning that the decline in prices was such that the point set by many holders of stocks as their "stop loss orders" had been reached, and, consequently, such selling orders were filled by the brokers.
In case of stocks being sold short (see "Selling Short ") a "stop loss order" may be placed as a preventative against too great loss in case of a sudden advance in price beyond a point at which the party desired the stock bought in for his protection.