Stop-loss orders are supposed to protect investors when prices plunge, but during Thursday’s market chaos, the strategy may have backfired horribly and contributed to the massive slide in stocks.
A stop-loss order instructs the broker to sell a stock or exchange-traded fund when the price falls below a certain level. But when the price level is breached, the order is automatically converted into a market-order, meaning the sale is executed at the best available price. That’s fine if the market is liquid and orderly, but when volumes are thin and prices are bouncing around violently, the sale may end up being executed at a ridiculously low price if that’s the only bid on the books.
Source: Globe and Mail
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