When a Stop-loss is not a Stop-loss?
One of the ways that you can limit your risk when you buy a position in the market is to place a stop-loss order to sell when the stock price declines to, or below, a stated price.
Unfortunately, a stop-loss is not a guarantee that you are going to be automatically taken out of the market if the price goes below where you have placed your order to sell. If the price “gaps” lower, it can jump over your stop-loss price altogether.
Does this mean your stop-loss becomes useless? No, what it means is that it becomes a Market Order and your position will be sold at the current going price, probably at or near to the lower point where the stock gapped.
Your stock will be sold as you requested, but potentially for a lesser amount than you expected when you placed the stop-loss order.
Does that mean you shouldn’t place stop-losses?
Absolutely not. The fact is, there is still a very good chance the falling stock may not jump your stop-loss and the automatic sale will save you a lot of money. And even selling at the lower gapped price might be a godsend if the price continues to plummet.
And remember, even if you do get bumped out of the market, you can always buy back in.