What does the stop loss price target mean?

A stop-loss order is a type of instruction given to a broker to buy or sell a security, such as a stock, when the price of that security reaches a certain predetermined price, known as the stop-loss price target. This mechanism is used to limit potential losses by automatically triggering the sale of the security when the price falls below a certain threshold. Here’s a detailed breakdown:

1. Definition: The stop-loss price target is the price at which a stop-loss order is activated, ensuring that if the security's price drops to this level, the order is executed to sell the security and thereby limit the investor's potential loss.
2. Purpose: It serves as a risk management tool, helping investors protect themselves from significant losses by setting a predefined price point at which the security will be sold automatically. This can be particularly useful when investors are concerned about market volatility or when they need to ensure that they do not incur excessive losses on a particular position.
3. Types of Stop-Loss Orders: There are two main types of stop-loss orders: stop-loss orders and stop-limit orders. A stop-loss order becomes a market order when the specified price is reached, whereas a stop-limit order becomes a limit order at the specified price, ensuring that the security is sold at a specific price or better.
4. Setting the Stop-Loss Price Target: Investors determine the stop-loss price target based on various factors, including their initial investment, the security's performance, and market conditions. For instance, setting a stop-loss 10% below the purchase price means the order will be triggered if the stock falls to 90% of its initial value, effectively limiting the loss to 10% of the initial investment.
5. Example: Suppose an investor buys 100 shares of Microsoft (MSFT) at $20 per share. They might set a stop-loss order at $18 per share. If the stock price drops to $18, the stop-loss order will be triggered, and the investor's shares will be sold at the prevailing market price, thereby limiting the loss to $2 per share.

In summary, the stop-loss price target is a critical tool for managing risk in trading, allowing investors to set a predetermined price at which they will sell a security to prevent further losses, providing a safety net in volatile market conditions.