What Is Stop Loss and How To Use It

Stock market trading can be complicated if the investor is not alert to the strategies to reduce the losses. The price of the shares may not always go in a favourable direction for an investor. The price may either increase or decrease. But an investor can use the stop loss option to avoid loss.

A stop-loss order is given to the brokerage house as a margin for avoiding heavy loss. When the investor wants to buy or sell the shares and the stop-loss order is executed, it is the right time to make the trade order. The trade order is executed when the price reaches the pre-determined level while trading. The broker can place this automatic order on behalf of the investor.

An example can make it easy to understand the concept if an investor has bought a share of a company named XYZ Ltd at Rs.100 per share and presents the share price at Rs.200 per share. An investor can decide to hold the claim when the price increases and the unrealized profits. To be on the safer side, the investor requests the broker to sell the shares if the price reaches Rs.150, as the investor may be able to decide this is a bearable loss.

The stop loss is more advantageous for the investor who cannot keep on watching the stock daily. This stands as a reminder to avoid loss. But when there is a disadvantage in stop-loss order, the price may again increase after a while; by selling the share, the investor cannot be able to enjoy the profits of the hike in price.

But the disadvantage can be broken by setting a pre-determined which allows the stock price fluctuation to fluctuate up and down in a trading day. The broker does not charge separately for this order as the usual commission is charged. The stop-loss order may occur only once, and the share is sold. Stop-loss secures the investor as insurance.

When To Use The Stop Loss Order?

The Stop Loss order is a big way for a trader to manage his intraday exposure in the market. Let us say that a trader wants to buy XYZ Company at Rs.200 because he expects the price to rise to Rs.220 quickly. But he does not want to take an unnecessary risk, and hence he wants to exit the trade (sell his shares) in XYZ company if the price drops below Rs195.

For example, He first buys 100 shares at Rs.200; then, to protect himself against an unexpected movement and limit his losses, he would place a stop-loss sell order for 200 shares of XYZ company. With a trigger price of Rs 195. He would choose to sell with a limit price of his choice (or) at the market price.

So if the shares of XYZ drop to trade at Rs.195, his order is immediately triggered and pushed into the queue for execution.

This system finds a similar application in the case of short positions.

How To Use Disclosed Quantity:

The system provides a facility for entering orders with quantity trade conditions.

Disclosed Quantity order allows the member to reveal only a part of the order quantity to the market display. Disclosed Quantity must not be less than 10% of the Order Quantity and, at the same time, should not be greater than (or) equal to the Order Quantity.