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Most stock exchanges offers a stop-loss service, meaning an automated sell if a stock drops below a predefined value.

Question: Is stop-loss safe to use? If the market undergoes a correction or flashcrash, could a stop-loss result in selling my stocks way below the predefined stop-loss value?

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    define safe... is it safer than NOT having one? yes, very much so.
    – MD-Tech
    Jul 7, 2017 at 9:42

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A stop-loss does not guarantee a sale at the given price; it just automatically triggers an unlimited sale as soon as the market reaches the limit. Depending on the development, your sale could be right at, slightly under, or deeply under the stop-loss limit you gave - it could even be it is never executed, if there are no further deals.

The point is that each sell needs a partner that buys for that price, and if nobody is buying, no sale happens, no matter what you do (automated or manually) - your stop loss cannot 'force' a sale.

Stop-loss works well for minor corrections in liquid shares; it becomes less useful the less liquid a share is, and it will not be helpfull for seldomly traded shares.

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    That depends on what type of stop loss orders you use - market, limit or even some brokers have guaranteed stop loss orders where for an extra small fee you are guaranteed your stop loss price.
    – Victor
    Jul 7, 2017 at 12:01
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A stop-loss order becomes a market order when a trade has occurred at or below the trigger price you set when creating the order. This means that you could possibly end up selling some or all of your position at a price lower than your trigger price. For relatively illiquid securities your order may be split into transactions with several buyers at different prices and you could see a significant drop in price between the first part of the order and the last few shares.

To mitigate this, brokers also offer a stop-limit order, where you set not only a trigger price, but also a minimum price that you are will to accept for your shares. This reduces the risk of selling at rock bottom prices, especially if you are selling a very large position. However, in the case of a flash crash where other sellers are driving the price below your limit, that part of your order may never execute and you could end up being stuck with a whole lot of shares that are worth less than both your stop loss trigger and limit price.

For securities that are liquid and not very volatile, either option is a pretty safe way to cut your losses. For securities that are illiquid and/or very volatile a stop-limit order will prevent you from cashing out at bottom dollar and giving away a bargain to lurkers hanging out at the bottom of the market, but you may end up stuck with shares you don't want for longer than originally planned. It's up to you to decide which kind of risk you prefer.

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