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.
What is Stop Loss or Stop Loss Order?
Stop 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.
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.
Stop Loss FAQs
Ques – What is Stop Loss or Stop Loss Order?
Answer – A stop loss order is basically an order placed with a stockbroker in order to buy or sell a particular stock once that stock reaches a certain price. It is designed to limit an investor’s loss on the security position, as such.
Ques – How to use Stop Loss?
Answer – The first thing you would need to do is opening the order option where you will find the ‘add stop loss option’. You have to enter the amount you can afford to lose from an investment and the order would be placed henceforth.
Ques – Is stop loss only useful for beginners?
Answer – Stop loss acts as a very beneficial safeguard for beginners who are new to the market and have no idea about the losses that occur as much as the course of profit on an investment. This relieves the investors from the constant monitoring they have to perform time and again in order to sell their stocks at the price that would benefit them.
Ques – What are the benefits of using Stop Loss?
- Losing a lot of money is the fear that investors have all the time and this feature will take away their pain.
- Your trading account will be entirely in your hands with an ease of monitoring.
- Stoploss makes keeping up with manifold deals easier than ever.
- Order is automatically placed by the system itself which keeps a trader out of the tiresome routine.
Ques – What are the disadvantages?
Quick orders are placed under the method of stop loss that reduces the future earning capacity by holding a stock in its entirety. Setting up the rate for a deal is it tricky part which requires heinous efforts on the part of the investor.
Ques – Can I use it for both intraday and F&O trading?
Answer – It can be used for both intraday as well as F&O trading. By putting a stop-loss, you will always be limiting your losses. It can be used for short-term as well as long-term investments but are mostly beneficial for day traders.
Ques – Does every broking app provide stoploss facility?
Answer – More or less every broking app provides this facility. By limiting the chances of losses, you invite huge benefits on your investment which is your long-term longevity and hoards of profit throughout.
Ques – Can I change its limit multiple times in intraday?
Answer – You can definitely change stoploss limit quite a few times in intraday. It is your defence against the volatility of the market. Any trader who has to live with volatility, should opt for this service. It makes sure that the market vulnerability does not throw you under the bus under any circumstances.
Ques – Can I use stoploss in Delivery Trading?
Answer – For instance, a stoploss by order under Zerodha can dare be marked as MIS or CNC. However since delivery trades or CNC are meant for long-term investments you have to just specify or ‘buy’ order’s type as ‘market’ rather than the stop-loss limit or SLM.
Ques – Does brokerage houses charge extra for this feature?
Answer – It is a pretty powerful tool available to all traders and investors in order to limit their losses. Most brokers do not charge extra for this type of order thus making it all the more effective for the traders.
