How do stop loss orders work?

Welcome to National Bank Direct Brokerage. This video will show you how to place a stop loss order on the NBDB platform. First, let’s define what a stop loss order is. It's an order that triggers the sale of a stock when its price reaches a certain value. 

Investors use stop loss orders for two reasons: to limit the amount of a potential loss on a security or to protect an unrealized gain on an existing holding.

Let’s look at a visual example of a stop loss order being placed to limit a potential loss. Here we have the chart of the X-I-C Exchange Traded Fund and let’s assume the shares were purchased at the price of $32,50. To protect the investor in the event that the share price drops. A stop loss order will be placed at the price of $31.50, a $1 dollar difference which represents a 3% price drop. If the price declines to $31.50 or lower the stop loss order will be triggered which will activate the order into a market order to sell the shares immediately.

Now let's say that before the market opens the following day there is some highly negative news in the market which causes the ETF to open at $30 or lower. The stop loss order would have been automatically triggered and the shares would have been sold but not at $31.50 but at $30.00 or lower.  Some investors might be happy that the shares were sold but others might have preferred to simply hold on to the shares than sell them at the lower price.

To avoid such a scenario, a stop loss order will also have a limit price.

The addition of a stop-loss limit price allows the investor to determine the minimum price at which the stock can be sold. In other words, the stop-limit price is essentially the share price below which the investor would rather hold onto the shares than sell them. In our example our investor could have set a stop loss order with a limit price of $31.00.

How you determine the stop loss price depends on your trading strategy, holding period and the volatility of the shares. Note that the closer the stop loss price is to the market price, the greater the chances of your order being triggered.

Let’s show an example using a transaction ticket but this time the investor wants to place a stop loss order to protect an unrealized gain. We're currently in the account holdings section, and the second stock in the account is Alimentation Couche-Tard.

The stock is currently trading at $76.80 a share and our investor would like to set a stop loss at $75 a share. The first step in placing a stop loss order is to click on the sell button located on the right-hand side of the holdings and a transaction ticket will open. You will notice that it’s been partially filled with the symbol, number of shares and account type where the shares are in, which will save you a few steps.

All the fields can be modified and the bid and ask prices can be refreshed by clicking on the double arrow icon shown here.

Next, we click on the Price Type and change it from at market to Stop loss from the dropdown menu. Then we need to add our trigger price of $75 which if reached will become a market order.

Next to it we have the limit price box, our investor needs to decide what the limit price is. Let’s go ahead with $73.00, this means the minimum price that the investor would be willing to sell their shares at. Below this price they’d rather hold onto them.

We then select how long the order will be good till, in other words, the order's expiry date. It can be valid for one day or up to 60 days. Once this has been done, all that's left is to click on Submit. 

An Order Summary window will appear, allowing the investor to review the order and make any changes by clicking on the Modify button, if not click on Confirm & Send Order. Here we can see that the order is open with our instructions. As long as its status remains open, the order can be modified or canceled at any time. 

To view the order, our investor can go to the Activities heading and then select Current orders from the dropdown menu.

This concludes our video on how to place a stop loss order on the NBDB platform