EXPLAINED: All you need to know about ‘stop-loss’ orders in 5 points

Investing in the stock market is exciting, but no one can ignore the risks involved. There, however, is a way to book orders which could check money drain beyond a point –- by using ‘stop-loss’. 

 

What is a stop-loss order? 

A stop-loss order notifies that a stock is bought or sold when it reaches a specific price point, also called stop-price. Once the stop price is reached, the stop order converts to a market order and is executed at the earliest opportunity. At times, stop-loss orders are used to prevent investor losses when the price of a security drops. For example, a trader may buy a stock and places a stop-loss order 10 per cent below the purchase price. When the price drops, the stop-loss order gets activated, and the stock gets sold as a market order. 

Stop-loss – an example  

A trader books 100 shares of XYZ for Rs 10,000 or Rs 100 per share; and sets a stop-loss order at Rs 90. The stock declines over the next few weeks and falls below Rs90. The trader’s stop-loss order gets executed and the position is sold at Rs 89. 

Advantages of stop-loss orders

Stop-loss is an important tool for traders. For those who are invested in a wide range of stocks, tracking individual stocks could be impossible, stop loss offers a simple solution that the stock is automatically sold when a price drops below a certain point and this helps to protect the trader’s balance. So, basically, a stop loss offers protection from excessive losses, enables better control of one’s trading account, is executed automatically, and is easy to implement. This also allows the trader to decide how much amount they are willing to risk. Stop-loss protects the investors' balance from a wipeout and provides a safety net to explore trading.

 

What are the disadvantages of implementing stop-loss?

Everyone knows that trading involves inherent risks, but while trading with stop-loss, one could end up selling an otherwise good stock too soon when a market is fluctuating temporarily. 

How to set up a stop-loss order?

Setting up a stop-loss order is easy. Look for the option ‘add stop loss’ while opening a deal. Choose an amount at which you would like to put a hard stop on the stock should the price drop and trigger sales. This is also a tricky point and the correct amount to decide a sell is something one learns as they practice more and more.  

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