Stop Loss – Meaning, Benefits, Usage, Example, Cons & more

Stop Loss is a word, a lot of stock market investors are familiar with. Also, there are a fraction of investors who are simply unaware, making this stock market related term under rated.

Stop Loss Order contributes in a great proportion to an investor, and changes the trading scenario up to an extent. Some of the brokers provide this facility, and the investors can use it up to its full potential.

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What is Stop Loss or Stop Loss Order?

Stop LossStop Loss put in simple terms, is automatic order placement for buying or selling a share. When a Stop Loss Order is placed, the system will execute the order as directed by the investors.

Stop Loss means, an investor can instruct the system to execute an order at a fixed price, i.e. the stop loss price”. When the security’s price reaches that level, the order will automatically be placed.

This spares the investors from the constant monitoring they have to perform, in order sell the stocks at the prices that would benefit them. Also, it is known as stop loss for a reason, where it safeguards the investors from incurring losses.

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    How to use Stop Loss?

    Budging in the Stop Loss order is one of the easiest things one can attempt to do. If you wish to execute it, it is more than easy to take such a step, and definitely rewarding.

    • So, it starts with opening the order option, where “Add Stop Loss” option would be displayed.
    • Now, you have to simply enter the amount. To be precise, the amount you can afford to lose from an investment. Also, a rate can be set wherein the deal would be closed, and the order would be placed.
    • Another kind of order you can make is, to make profits.

    However, the issue one can encounter here is of knowledge about right prices. There can be a confusion, as it is a challenge to know the right price at which the order should be set.

    As time goes by, and you begin using such order, you will get accustomed with it. Frequent uses will lead to increase in the worthiness of such an option.

    Benefits of Stop Loss Order

    Individual traders have a difficult time coping up with all the segments, exchanges and markets. It is difficult for a single individual to keep up with everything there exists. So, they can experience Stop Loss benefits, that are described below.

    • Losing a lot of money is the fear investors carry, and this features offers immunity to the same.
    • Your trading account will be in your grasp entirely, where you can monitor it easily.
    • While it is difficult to keep up with multiple deals, stop loss makes it easier.
    • The order is placed automatically, by the system, keeping the trader out of the routine.
    • Process of placing the order is absolutely seamless.
    • The amount you are willing to gain or ready to lose entirely depends upon you.

    Disadvantages of Stop Loss

    While there are addressed advantages tagged to a stop loss order, there are as well fine share of its Cons. Such cons are only known by the experts of the industry, as they use the tool accordingly. Here are the ones you need to be aware of:

    • A slight downfall or surge would likely close a pretty valuable deal for the investors. A quick order is placed under this method, where the stocks are bought or sold, and is done immediately. Such quick deal reduces the future earning capacity, holding a stock brings in.
    • Also, setting up the rate for the deal is the tricky and the difficult part. There can never be the right rate or price, and there truly isn’t.

    Example of Stop Loss

    Putting it out in a simple way for our readers, we have also included a Stop Loss Example in this article. This shall clear your concept, with a hold of practicality.

    Suppose you hold 20 of a company’s shares, which you bought at the rate of Rs.510 each. Present market value of the share is Rs.570, and you anticipate a further increase so you wish to hold it.

    Now, you wish to make sure you do not lose all of the possible profits you have managed to reach this point. So, you can set up a stop loss at Rs.520. So, when the prices drastically fall, your shares will be sold at this price.

    You will not have to monitor such a stock all the time, to have to keep updated with the prices taking into account your lose margin.

    Stop Loss – Conclusion

    Price changes are the basic phenomenon of stock market and how the entire profit and loss frame work is done. The tool Stop Loss, is actually a great supporter, where you gain brief and strong control over your trades.

    Reduction of risk from Stop Loss Order is the primary trait one looks out for. So can they earn profits in return from such a tools, which is trader interest and betterment driven. Take control over your profits, as well as your losses next time you commence a trade.

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