What Is A Stop Loss In Share Market?

Stop Loss order means the investor and broker have set an automated instruction if the price of a stock falls at a specific level to protect them from Loss and execute the sale of a security.
Stop Loss helps several investors manage all their losses by selling their bonds and stocks if there are chances of dropping below a certain level.
Let us understand the actual meaning of stop-loss with the help of an example:
Suppose Aman holds 1000 shares of Tata Motors, which he purchased for 200 per share, which means he has invested RS 2,00,000 in Tata Motors.
Due to any reason, if the price of these stocks started falling rapidly, Aman can use the stop-loss order with his broker. In such a situation, Aman will set RS 150 if the price drops in the future. Hence, there will be a loss of RS 50 per share on this transaction.

There are two types of stop-loss orders in the share market:

• Fixed Stop-Loss Order
• Trailing Stop-Loss Order

Fixed Stop-Loss Order

Fixed stop-loss order means a sudden shock when an investor has set a pre-determined price, and it got hit. They can also be time-based, and these are commonly used till the trade is placed.
Time-based fixed stop are most beneficial for investors who want to stand at a pre-set amount of time before gaining profit and stepping towards the next trade.
These investors make use of time-based fixed stop when the shares are positioned and sized properly to stop high swings in share price.

Trailing Stop-Loss Order

Trailing stop-loss order provides net profit and protection to an investor while providing a boundary against the unexpected downward trend in the share price.
This order is set upon the percentage of the total price and the order to sell in case if the market falls below the demand level.
However, when the share price increases, the trailing order instantly adjusts in tune with an entire increase in market valuation.

• Advantages

Here are few advantages that every investor know while using the stop-loss concept:
1. Reducing losses
The primary benefit of a stop-loss order is it helps you to reduce all your losses and protects you against a huge loss in the stock market. Thus, there are times when several investors didn’t place a stop order when the prices were falling rapidly and turned out to be quite ugly.
Thus, placing a stop-loss order will help these investors from a big loss in the stock market.
2. Acts as an automation tool
Stop-loss order acts as an automation tool and automatically sells your stock as soon as the price falls below the set price. You don’t need to monitor your portfolio all the time, as stop loss will automatically hit once the stock touches the pre-determined price.
3. Helps to maintain risk and reward
While trading in the stock market, it is essential to maintain risk and reward. If an investor is looking to obtain a specific reward, they should only take a fixed amount of risk.
For example, they have to define that they will take 5%, 20%, or 50% for getting that much profit, and applying stop loss will help them to maintain their risk and reward.
4. Promotes Discipline
Investor should keep their emotions away while investing in the stock market. Stop-loss order will help them to stay motivated towards their financial planning and strategies and promotes disciplined trading.

• Disadvantages

Apart from having advantages in stop-loss order, there are few disadvantages that every investor should know while using a stop-loss concept.
1. Short term fluctuations
The primary and major disadvantage of using stop-loss order is that when there are short-term fluctuations in a share price, it can get activated and adds risk to the investors.
One thing that every investor must remember while selecting a stop-loss order is that it should allow the stock to move and must provide less risk as possible.
2. Selling Stocks Too Early
The only risk involved in the stop-loss order tool is the risk of being stopped out of a trade that has the potential to give more profit if the investor has agreed to accept a bigger and higher level of risk.
Thus, stop loss close its deals too soon and limit the profit potential of an investor.
3. Investors Need to Decide The Stock Price
While using stop-loss, investors have to take a call and need to decide which price is to be set while stocks are falling. It is a very tricky part for investors, but they can seek help from financial advisors with the help of their contacts.
4. Expensive
There may be some time when your broker will charge you for using stop-loss to be added to the brokerage fees.

• What is Stop-loss?

Stop Loss order means the investor and broker have set an automated instruction if the price of a stock falls at a specific level to protect them from loss and execute the sale of a security.

• What does fixed stop-loss order means?

Fixed stop-loss order means a sudden shock when an investor has set a pre-determined price, and it got hit. They can also be time-based, and these are commonly used till the trade is placed.

• Does stop-loss automatically sells your stock?

It automatically sells your stock as soon as the price falls below the set price. You don’t need to monitor your portfolio all the time, as stop loss will automatically hit once the stock touches the pre-determined price.

Final Thoughts

Stop-loss is a simple and effective tool that several investors fail to apply effectively while trading. Whether they are looking to prevent excessive losses to lock all your profits, you can apply and gain benefit from this tool.