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Definition

A strategy to sell out of a share (or other security) after it has fallen by a pre-determined percentage from its highest level since it was purchased. For example, the simplest 10% stop-loss strategy on a share which you paid 1000c for would mean selling it when it had fallen to 900c (i.e. 10%). A stop-loss strategy acknowledges that fact that investment in the share market (or any market) is a matter of probability and not of certainty. You might have made a mistake in your choice of share or in your timing - or both. Therefore, you should acknowledge that possibility by establishing a price level at which you will definitely sell the share so as to protect the bulk of your capital. There are a variety of refinements which can be added to a simple stop-loss strategy such as widening the percentage when your investment goes in-the-money by more than a certain amount. Or reducing the stop-loss percentage when you have a greater exposure to a particular investment. In general, stop-loss levels should be reduced by the amount of a dividend on the ex-div date.

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