Why It Matters
Stop-loss orders generally are a trading or short-term investing strategy. They are useful because they help reduce the pressure of monitoring your trade day-to-day; the trade is largely set on autopilot. This can be particularly helpful for emotional investors.
Even though stop-loss orders offer crucial trading discipline to investors by helping them make important decisions about cutting losses, they also increase the risk of getting out of a position too early -- especially when volatile stocks are involved. In our example, if XYZ was known to be volatile and fluctuated from $8.00 to $12.50 during the one-month forecasting period, then you would miss out on the price appreciation that you expected.
Long-term buy-and-hold investors probably don't want to make substantial use of stop-loss orders. When a stock goes lower, stop-loss orders will lock in losses rather than give you a chance to evaluate whether a slight price decline is actually signaling a buying opportunity.
Source: Investing Answers
