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Stop Loss – What is Stop Loss & How to Use it in Share Market

The stock market is one investment avenue that can change your fortunes. The sky is the limit when it comes to making returns in the share market. While it gives you immense opportunity to earn profit, there are equally good chances of making losses and eroding capital if wrong trading decisions are made or if the market does not move as per your expectations.

Often people lure with the idea of intraday trading as it has huge potential to make solid returns in just one day. However, things can go the other way than expected and you can end up making losses too. In such situations, by putting a stop loss in share market you can protect your capital. This article will help you in understanding the concept of stop loss and why it is important.

Let us begin by learning what is stop loss?

What Is Stop Loss?

Stop loss can be said to be a specific price level at which an automatic order to buy or sell shares/securities is executed. Stop loss protects you from excessive losses and saves your capital for future trading by reversing or closing your positions with minimum losses. It also saves you from constant monitoring of the stock or securities price.

Let’s take an example to understand how the stop loss works. Suppose you have purchased 100 shares of Reliance Industries for intraday trade at Rs. 1400 with a stop loss of Rs. 1385. This stop loss will close your trading position or sell the 100 shares when that specific price is triggered. The stop loss here saves you from the loss that could have occurred had you held the position and the price went down drastically. So if during the trading session, the price of Reliance Industries goes below or touches Rs. 1385, your stop loss would be trigged. Thus, in a sense, the stop loss safeguards your capital and always keeps you in the game to take a new trade. Stop loss can be put manually when you place an online order or you can instruct your broker to put a stop loss if you purchase stocks on telephonic communication.

Let us now learn the benefits of putting a stop loss in the market.

Benefits of Stop Loss in Market

  • Stop loss trading can protect you from excessive losses.
  • Stop loss makes you a better and disciplined trader. It helps you in managing your account more efficiently.
  • By putting a stop loss in share market, you are no longer required to track each and every position. If the stop loss is hit, the position will square off automatically.
  • Stop loss are easy to put.
  • Stop loss trading helps you in knowing your risk appetite. As a trader, you get to learn about the amount of risk you can take without impacting your financial status.

After learning the benefits of stop loss in share market, let us now learn how you can set up a stop loss order.

How to Set Up A Stop Loss Order?

Setting a stop loss order is very easy. When you place an online order to purchase or sell stocks, you will get the option to add a stop loss. You need to fill the exact amount where you want to place the stop loss. You can also place a bracket order. A bracket order is designed in such a way that a buy order will have two opposite orders, the first order is the price at which you would like to book profit on the higher side and other order is the price or stop loss where you would like to close your trade when the stock price goes down. Bracket orders for sell positions are just opposite to the buy order.

One thing is clear that by putting stop loss in place the traders specially the smaller ones can protect their capital by limiting their losses. By carefully placing the stop loss, you can become a disciplined trader and take better trades. Stop loss minimises the risks and maximises your profits. If you are new to the world of the stock market or want to learn to trade using the stop loss, you can open a demat account with IndiaNivesh Ltd. We are one of the most trusted and professional financial services group in India.

Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."