When buying or selling shares, a stop-loss order can help limit your losses if the share price moves in the wrong direction. A stop-loss order is an order to buy or sell shares at a specified price and is generally used to limit losses in a falling market.
Stop-loss is a straightforward and useful tool many traders fail to use properly. You may use and benefit from this technique whether they’re trying to lock in all your gains or avert excessive losses. Here we will look deeper into stop loss meaning and understand its types.
What is Stop Loss?
To your query of what is stop loss in the share market, here is a simple answer. An advanced order to sell any asset when it hits a specific price point is known as a stop-loss. It is used to control potential profit or loss in a trade. Both short-term and long-term trading may be done using this idea.
Stop orders or stop-market orders are other terms for stop-loss. The investor orders the agent or broker to sell a security when it hits a certain price limit by placing a stop-loss order.
What is a Stop Loss Order?
A stop loss is an order placed with a broker to sell a security when it reaches a certain price. This is done to limit an investor’s loss on a security position. A stop-loss order becomes active when the security’s price trades at or below the stop price.
A stop-loss order is a tool for short-term financial investments. They utilize it when investors don’t want to feel pressured to monitor security constantly. The deal is automatically initiated, and the restrictions are predetermined. Small investors will benefit greatly from this.
For long positions, a stop loss can be placed below the security’s recent low price; for short positions. It can be placed above the security’s recent high price.
When you place a stop-loss order in the share market, you tell your broker to sell your shares if the price falls to a certain level. This is designed to limit your losses if the share price falls sharply.
Stop loss orders can be placed as either market or limit orders. A market order will be executed at the best available price, whereas a limit order will only be executed if the shares reach your specified price.
Types of Stop Loss Order
There are four main stop-loss orders in the share market: the standard stop loss, the trailing stop loss, the stop limit, and the stop-loss market order.
Standard Stop Loss
The standard stop loss is the most common type of stop loss order. It is an order to sell a security when it reaches a certain price, known as the stop price. The stop price is typically below the current market price, so the order is usually triggered when the security price falls.
Trailing Stop Loss
The trailing stop loss is a stop loss order that automatically adjusts the stop price as the security price moves. For example, if a trailing stop loss is placed at 10% below the current market price, and the security price falls by 5%, the stop price will automatically adjust to 5% below the current market price. This type of stop-loss order is designed to limit losses while allowing the security to continue generating profits.
Stop Limit
The stop limit is a type of stop loss order that combines features of the standard stop loss and the trailing stop loss. The stop limit is an order to sell a security when it reaches a certain price, known as the stop price.
However, unlike the standard stop loss, the stop price is not always below the current market price. If the security price falls and triggers the stop price, the order will only be executed if the security price is at or below the limit price. The limit price is typically set below the stop price, so the order is only executed if the security price falls further than the stop price.
Stop Loss Market
The stop-loss market order is a type of stop-loss order that is triggered when the security price falls to a certain level. Unlike the other stop-loss orders, the stop price for a stop-loss market order is not set by the investor. Instead, the market sets the stop price, and the order is executed at the next available market price.
Advantages of Stop Loss Order
A few advantages of using a stop-loss order in the share market exist.
- Firstly, it can help to limit your losses if the share price falls.
- Secondly, it can help to protect your profits if the share price rises.
- Thirdly, it can help to take emotion out of the decision-making process, as you have predetermined the price you will sell.
Overall, a stop-loss order can be useful in managing your share portfolio. However, it is important to remember that stop-loss orders are not guaranteed, and there is a risk that your shares may be sold at a price lower than your stop-loss price.
Conclusion
Even though many investors are not aware of phrases like stop-loss order and wonder what is stop loss, they can definitely save your life. It is one of the best tools for protecting investors from significant losses.
Some people use it well to halt losses from their investment trip, while others avoid it owing to a lack of stop-loss expertise.
When applied correctly and appropriately, stop-loss may significantly impact investment. Every person who enters the stock market has to understand what a stop-loss is.