Parsons then placed another stop loss order at $9 to protect gains on his remaining 3,000 shares, he said. MannKind announced around 3:30 p.m. on Jan. 19 that the company failed to win approval from the Food and Drug Administration for its inhaled insulin. The stock plummeted as much as 45% in late trading and when the market opened the next day, Parsons said his shares sold at $5.07, or $4 less than his specified price.

"They remove investment judgment from the equation," said Donabedian, who generally advises his clients against placing stop loss orders on shares. Atlantic Trust, based in Atlanta, has more than $16 billion in assets under management. Investors don't always get the price they want and may lock in a loss before a stock rebounds for a "double whammy," he said.

Another Tool

Stop limits are another tool traders use, said Gregg Murphy, senior vice president of retail brokerage at Fidelity, which has 12.7 million retail brokerage accounts. These orders guarantee a price but not an execution of the sale, he said. They may not provide greater protection than stop losses because if a stock falls below the limit before it's sold, investors may be stuck with the security, Murphy said.

Diversifying your portfolio is one way to mitigate risk without a stop loss or limit, said Pamela Rosenau, managing director and equity-market strategist for Chicago-based HighTower Advisors. "You don't want to have over-sized positions," in one stock, said Rosenau, whose office is in New York.

Rosenau, who manages about $703 million of client assets, also says she watches the fundamentals of a company rather than market swings when deciding whether to sell. "If they deteriorate, I'm out," she said.

Investors may also use options to hedge risks against declines, said Schwab's Frederick and Fidelity's Murphy. Options are contracts that grant buyers the right, without the obligation, to buy or sell a security at a set price. Unlike stop losses and limits, they cost money. One put option giving an investor the right to sell 100 shares of a security, for example, costs $7.95 for the commission and 75 cents for the contract, Murphy said.

Insurance Policy

"It's like an insurance policy, so if you don't need it, you end up spending money on it anyways," because the option has an expiration, said Frederick.

"Let's say I owned a $9 put option and the stock drops to $6. I can call my broker and say I want to exercise the put option, in which case I'm able to force my stock on somebody else at $9 a share," Frederick said.