How does a stop-loss order work and when should a long-term investor use one?

A stop-loss order becomes a market order once a stock falls to a price you set, automatically selling to cap further losses. A stop-limit adds a floor price so you don't sell into a crash at any price, but it risks not filling at all. Day traders use stops to enforce discipline. For long-term buy-and-hold investors in diversified index funds, stop-losses usually do more harm than good: normal market dips can trigger a sale near a bottom, locking in losses right before a rebound, and you may face taxes and the challenge of deciding when to buy back. If your worry is volatility, adjusting your stock-to-bond allocation is a better tool than stop orders. Reserve stops for concentrated single-stock positions you actively want to limit.