Have you ever heard of the term ‘Stop Loss’ (SL) while trading in the stock market? If you are a first-time investor, then you may be alien about this term but there is no need to take any stress as it, not a rocket science that will be difficult to understand. When you are planning to undertake a stock market investment, then it is highly important that you must be aware of the stop-loss order used to take an advantage of it and limit your losses.
What Actually is a Stop Loss?
Stop loss is basically an automatic order, which is placed by an investor or trader with the broker. Here, the broker is instructed by the investor to sell a share when it reaches a specified price limit. In simple terms, the trader can decide upon the rate at which the deal must be closed automatically to minimize losses in the stock market.
How to Use Stop Loss?
Here is an example of stop loss to better understand its usage and trade in the stock market successfully:
Let us say that you have bought 100 shares of a Company ABC at Rs. 1500 per share. You expect a target price of Rs. 1650 per share so as to earn a profit margin of 10%. After buying the shares, you put a stop loss at 5% which is below the purchase price that is at Rs. 1425 per share. Now, consider a situation that you have achieved the target price of Rs. 1650 per share and you assume that the prices will further rise to Rs. 1800 per share. Considering the volatility of the market and to secure the profit and minimize the losses, you further extend your stop loss level at Rs. 1700. Now, if share prices drop, then you will be saved from incurring heavy losses. The shares will be sold immediately automatically at the current market price as soon as the price hit Rs. 1700. Hence, by using the stop-loss option, you can minimize your loss and trade in the stock market hassle free.
Stop Loss Advantages
- The biggest benefit of the stop-loss order is that you limit the losses. There have been many instances when the share prices have fallen drastically and if the stop loss option is not used in a timely manner, then, then you may lose your hard earned money.
- The process of selling the stocks will be automated. It is really useful as you are not required to visit the stock market every day and sell the shares. If the price of a share touches a specific price level, then the stop-loss option will be triggered automatically.
- The biggest advantage of the stop loss is that it costs nothing to implement it. All you have to do is to pay a certain brokerage fee or commission to the broker/agent, once the stop loss price has been reached and the share must be sold.
Using the stop-loss option can turn out to be highly beneficial and smart way for the individuals trading in the stock market. It can turn out to be an excellent tool if used properly. For the beginners, using this option may be challenging or difficult to understand. In such a situation, it is important to seek the help of the financial advisors or stockbrokers to ensure that you do not experience any problems while investing or trading in the stock market and maximize your profit potential.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.