Stop Loss is a critical part of Risk Management. Think of it like a ‘safety net’. It has two purposes: to prevent big losses and to preserve capital appreciation. When you decide to buy a stock you are actually going to place two orders. The first is your Buy order. After purchasing a stock you now have the exact price you paid for that stock. Now you place another order called a Stop Loss order. The simplest stop loss order works like this – the price of the stop loss order is set below the price of the stock just purchased. If the stock’s price drops to the amount of the Stop Loss, the broker will sell that stock in order to prevent additional loss and preserve capital appreciation.