What Is Stop loss and its importance in stock trading?
What Is Stop Loss?The word itself explains it Stop your losses. A stop loss is an order to buy or sell security or commodity once its crosses particular price either upside or downside. Its an important tool provided by exchanges which help investors to control their risk of loosing money more than their pocket allows it. Mainly stop loss is more used in intraday trading.
Stop loss is very useful in a stock trading and also for active traders, they can simply make a position in stock market and can place a stop loss and target in it so after that they do not need to watch price of script again and again, as soon as price reaches the target it automatically gets booked or if the price reaches the stop loss level placed by investor its gets automatically booked the loss, specified by investors.
The major disadvantage of stop loss limit order is that in huge volatile market conditions stock could not be
executed due to
no buyer or seller in limit price.
But it has lots of advantages like
1. It can prevent small losses becoming the large one.
2. It can save you from unexpected news come in market and makes sudden move in price.
3. No extra brokerage or commission is charged , same charges for execution of trade.
4. No need to monitor stock on daily bases, simply placed a stop loss and can go on vacation or in a situation when you can not monitor price.
5. Traders can invest in other stock too with a freedom of monitoring same stock again and again.
Most of the times investors have experienced it that if they do not placed the stop loss order and assumed that they will exit the stock manually once price reaches their exit level, they suffered more losses just because they could not exit due to price volatility in stock markets. So in this case stop loss is a important tool, as its fully automatic.
Though many investors think that a stop loss order is only associated with a long positions, but it can also be used for a short position, in this case the shares will be exited if stock trades above the defined price
Moreover their are no rules set for placing stoploss orders. Some Traders use very tight stoploss orders, soe uses high stop loss orders it all depends on how much a investor is willing to take risk it , so according they place a stop in markets
For example, Investor "X" has placed an order with his broker to buy 1000 shares
of Reliance Inds at Rs.1000/- per share.
he is expecting that the stock to rise up to Rs.1050/- per share.
Now Mr X thinking if price fell below Rs.980,it may go down further. So Mr X does not
wants to hold the Reliance Inds if price fells below 980.
In this case Mr X will place an order in market named "Stop Loss" that if the price touched Rs.980 then
sell 1000 Reliance Inds share
This is what is called stop loss.