A “stop loss order” is simply an instruction to sell something at a predetermined price, in order to prevent larger losses normally. For example, if you bought Stock XYZ at $50/share hoping it would go up, you could also limit your potential loss by instructing your broker to automatically sell the stock if the price dropped to $45/share, a decline of 10%. This happens all the time with stocks and some use it to help keep their emotions in check when investing. It can also help you from losing your shirt.
A Stock Doesn’t Care If It’s Owned, But A Mutual Fund Does
Whether or not you believe in the strategy of using stop loss orders, I was wondering why these types of orders are not allowed for mutual fund holdings. Then you realize that a stock doesn’t care who owns it (or doesn’t own it), but a mutual fund does since there are fees being collected from the holders. The more units, the more fees. If investors were allowed to place stop loss orders on mutual funds, assets under management (and hence revenues) could dry up quickly in certain market conditions. Further, since the embedded trailing commissions to financial advisors who use loaded mutual funds would also drop, how would they put food on the table with the current predominant compensation structure of the industry?
This doesn’t seem to be in the interests of investors first and foremost.