What is Stop- Loss and How it works?

Before we start talking about stop loss, let’s have a brief about what is trading as "Stop Loss" order is related to trading. As you all know trading is buying and selling of goods and services.

In stock market, trading means buying or selling of stocks, currencies etc. There are few rules which a trader must follow in stock market to be a successful trader. A Trader must have a vision about his trade like what is the target price where he will exit or if he is losing money, where he will book the losses.

What is Stop Loss?

In simple terms, stop-loss is an automatic order given by the investor to buy or sell a financial instrument once its price reaches a specified level. In other words, the investor will book losses and square- off the trade. This specific price is also known as “the stop price.”

This order is executed automatically, which means you don’t have to monitor your deals constantly. Stop-loss also depends the upon the risk appetite of an investor or trader. Trader mostly prefer short stop losses as trading is their day to day activity, whereas short term investors are ready to wait on their stocks and prefer deep stop losses which depends upon their conviction on the stock.

“Stop Loss” not only saves your time but also protects you against excessive losses. More than that, it enables you to pay attention to the other things in life.

Stop-loss orders help you minimize your risk. You can decide what amount you are willing to risk. They also enable you to monitor multiple deals at the same time, enhancing the entire process of monitoring of deals.

Talking about disadvantages, your losses get booked but to be a successful trader stop loss is a part of trading discipline which every trader must follow.

Suppose that you have 1000 shares of a company’s stock, which you purchased at the rate of INR 105 per share. Now you expect the stock prices to hit INR 120 per share in the near future. But you are afraid of having to bear huge losses if things don’t turn out to be the way you’re assuming.

In such a case, you can instruct your broker to fix a stop-loss order at INR 100 in your account. This means if the value of the stock falls to INR 100, the trading system will automatically sell your shares.

However, if the stock prices go up as per your expectation, you will make good profits.

Basically, a stop-loss order helps you manage your deals and funds effectively while restricting your losses to a certain specified level.

If you still have doubts about stop-loss orders, you can connect with our financial experts at helpdesk@myfindoc.com.