A Stop-loss order is a feature designed to prevent investors maximum loss.
Stock market investing is sometimes very risky, it is a game of investors’sentiments (in a short term), any sudden news or event may stir up the volatility.
In that case, there is always a possibility that investors may lose grate amount of wealth.
Stop-loss helps investors to limit their losses, setting Stop-loss is a highly effective exercise in stock market investing, it reduces investors’ losses in long term and the short term also.
In the following article, we are discussing.
- Understanding stop loss.
- How to put a stop-loss.
- Where to put a stop-loss.
- Advantages of stop loss.
Understanding stop loss.
Stop-loss order is a feature integrated by most discount and, full-service brokers to limit investors’ losses.
Stop-loss has been set on those specific prices where investors cannot bear the losses below that specific price.
Every investor has considered a limit for profits and losses, if stock prices fall below the set limit then it will heavily affect investors’ wealth.
Stop-loss helps investors to follow these limits effectively.
If the stock price falls below the stops loss order then the order becomes a market order and is executed at the next market price.
E.g suppose investors set a stop-loss order 10% below the stock’s current market price, the current stock price is INR 500 when prices fall below INR 450 then a stop-loss order is executed and the stock will be sold at the next current market price.
Once the stop price is met, the stop-loss order becomes a market order and sold or buy at the next available opprotunity.
How to put a stop-loss.
Instead of choosing market order or normal order select stop-loss order, where the broker will ask, quantity, buy price (Either investors need to enter specific price where they want to buy by selecting limit, or they can buy at whichever market price is available by selecting market)and trigger price.
Trigger price is a stop-loss price or limit where investors want to execute the order whenever prices will fall below this limit price.
Note; Stop loss is able to set for uptrend also, just like lower limit, higher limit also can be set (usually happens in case of short selling)
Where to put a stop-loss.
Stop-loss is the most important thing in stock market investing, always put your stop loss on those price points which has very rare chances of a hit otherwise, your stop loss will hit again & again.
The best strategy to put stop loss and also, recommended by experts is, always put your stop-loss on 2nd swing low, 1st swing low always hit most of the time that’s why don’t put your stop loss at that price point, 2nd swing low has very low or rare chance to hit so, 2nd swing low is recommended are for stop loss, if stock prices fall beyond 2nd swing low then the stock goes beyond the trend.
Swing lows are those price points where the stock price bounces back to uptrend.
Generally, any particular stock moves upward by going through multiple swing lows, the recent swing low is 1st swing low, and 2nd swing low was that swing low that comes before 1st swing low.
Advantages of stop loss.
- it’s just an additional feature in stock market investing, it will cost nothing extra from investors.
- with stop-loss investors don’t need to monitor their holdings daily.
- it will minimize the investor’s losses.
- stop-loss is the most important thing in margin trading, where risk is very high.
Disadvantages of stop loss.
- high volatility & short-term price fluctuation in the stock market sometimes trigger stop loss unnecessarily.
- unstrategic stop loss can also trigger stop-loss unnecessarily.
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