What is slippage?
Slippage is the difference between the price a trader expects to pay or receive and the actual price they pay or receive because of the way the market has moved by the time their trade is executed. This happens even with trading online, in the split second it takes between an order being given and received.
Where have you heard about slippage?
Slippage is an important term in investment guides as it is present in all buying and selling of any security. 'Negative slippage' is a common issue in foreign currency trades.
What you need to know about slippage...
Slippage often occurs during periods of higher volatility when market orders are used, and also when large orders are executed when there may not be enough interest at the desired price level to maintain the expected price when the trade occurs.
Among the orders prone to slippage are market orders, where the broker is instructed to trade at the best available next price, and stops and limits, when a sudden price movement makes it impossible to trade at the price specified in the order.
Although slippage is often considered to be negative, it can in fact be positive for the investor. This is because the difference in price between order and purchase of a stock can change for the better.
Slippage risk can be minimised by planning trades in advance or by using risk management tools such as guaranteed stops.