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Stop Loss

What is Stop Loss and how to use it

Trading in the stock market can be tricky when you aren't aware of strategies that can minimize your losses. When you buy shares or sell shares, their prices can often go in a direction that may not be favourable to the investor.

This is where a stop loss order comes in.A stop order is a type of trade order given to a brokerage house. While a traditional market order is one to buy or sell shares at a particular price, a stop loss order indicates that an investor wants to execute a trade order, but only when a certain pre-determined price level is reached during trading. It is hence an automatic order to be executed by a brokerage house on behalf of the investor.

To understand this concept, here is an easy example: If you bought one share of Company ABC at Rs. 10 and it is now trading at Rs. 20 per share, you can continue to hold the share incase the price goes up more and trade in the unrealized profits so far. However, you inform your brokerage house to sell the stock in case the price goes down to Rs.15, as that is the maximum amount of loss you are willing or able to realize.The main advantage of a stop loss order is that you need not watch over a stock on a daily basis to see its performance, in case you are unable to. However, a disadvantage of it is that the order could kick in even when there is a short-term price fluctuation, which could result in an unnecessary selling of stock.

The trick is to allow a stop loss percentage that allows the stock to move up and down in a day without hitting your pre-determined limit.This sort of order comes at no cost to the investor as regular commission is charged by the broker only once the stop loss price has occurred and the stock needs to be sold. Whether you are engaging in online share trading or in any other avenue available, stop-loss is an insurance that every investor should undertake.
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