Equity |
February 08What is Stop- Loss and How it works?
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 ruleswhich 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 losingmoney,where he will book the losses.
Now let’s
talk about our topic “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
otherwords, 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.
What are the Advantages and Disadvantages of Stop-Loss
Orders?
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.
How Stop-Loss orders work?
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.
