In this article, we will see what is stop-loss order is and how we can use it to avoid more losses and preserve the capital.

Introduction

The legendary investor, Warren Buffett said that you should follow 2 rules while investing. The first rule is to never lose your money. The second rule is never to forget rule no. 1.

In investing or trading we can only survive until we have our capital. You can’t trade or invest without any money, right?

What is Stop Loss Order in the stock market?

Use the stop-loss order to protect your capital and avoid losses more capital and preserve the same for better trades. How can investors minimize their risk by using it?

A Stop-loss order is an order after which if the stock touches a certain price, it will be sold automatically. When stock price touches a certain price, a market order is executed and our stocks are sold.

For example, if an investor buys a share at Rs 100 per share, he wouldn’t want to bear a loss of more than Rs.10 per share. Then that investor can put a stop-loss order at Rs 90 per share. As soon as the stock price will reach Rs 90, the share will be sold automatically in a market order.

To Know more: How to do Swing Trading while working 9 to 5 IT Jobs?

What is stop-limit order in the stock market?

The purpose of both are almost the same, but they have a small difference. In a stop-loss order, when the stock price hits the trigger price, then a market order is executed. Our stock is sold.

In stop-limit order, when the stock price hits trigger price, then our sell order becomes a limit order. The market order is executed immediately while the limit order is executed as the stock price crosses the limit price.

Let’s understand both orders with a simple example.

When we had put Rs90 stop loss, after this if the stock price goes below Rs.90, our stock price will be sold at market value. Suppose, if the stock price goes from Rs.95 to Rs.91, and then to Rs 85, the stock will be sold for 85 Rs.

In stop-limit order, it doesn’t happen. In stop-limit order, when the stock price falls below Rs.90, our limit order will activate. it ensures that the stock won’t be sold below Rs.90. This will be sold at or above Rs.90 only.

The main purpose of a stop-limit order is that many times stock price falls a lot below the limit order at which investors don’t want to sell. Investors want that when the stock price comes up again and hits the limit price, then their stock should be sold. In this case, a stop-limit order is useful.

Advantages of a stop-loss order.

  • The biggest benefit is that reduces your risk, and saves you from big losses in the stock market.
  • It has no emotionally attached to that trade. In emotions, investors try to give a second chance to bring their stocks at profit. Due to this, there will be a big loss to suffer So the stop loss saves you from emotional attachment and helps you exit from the stock at the right time.
  • The stop-loss order reduces losses also helps you lock your profits. Suppose you bought a stock at Rs.200 per share. Then its price comes to Rs.250. You expect the prices to rise, also you want to lock profits. In this case, you can put Rs.240 as a stop-loss order. After this, if the stock price goes below, you will be able to earn Rs.40 profit.

So these were a few benefits of a stop-loss order.

Disadvantages of a Stop-loss order.

  • The biggest drawback is that due to short-term fluctuation, the stop-loss order will be activated and your stock will be sold. So it’s very important at what price are you setting the stop-loss. For example, an active trader can set his stop-loss at 5%. But for a long-term investor, it can be more than 15%.
  • Stock may be sold for a lower price due to stop-loss. Like we saw that your stock may get sold at Rs. 85 also. To avoid this, you can use a stop limit as well.
  • The risk in stop-limit is that many times your order is not executed.

So we discussed what is stop-loss and how is it beneficial for investors. A stop-loss order can save you from heavy loss and you can exit from the stock at the right time. Also, you can lock your profits with it. It is useful for both intra-day traders and long-term investors.

Don’t forget to subscribe to the Groww channel for the latest updates. Video Reference.

Thank You.

LEAVE A REPLY

Please enter your comment!
Please enter your name here