What is Stop Loss in Stock Market in Simple Terms?

One and only objective of any kind of investment is making a profit. By avoiding loss, every investor tries to make a highly profitable return. There are many investors who don’t realize what to do to secure themselves in the stock exchange. There are few policies and strategies that you can use to shield yourself from pitfall in both buying and selling stocks. In this content “What is Stop Loss in Stock Market” we will cover stop loss in simple terms and methods to use.

What is Stop Loss in Stock Market

The main aim of setting stop loss while trading is to set the limit of the loss. One and only function of the stop-loss order is to limit the loss. Stop-loss is also referred to as “stop order” whereby the investor instructs the broker to automatically sell or buy a stock if it drops or arises at a certain price. The strategy can be applied in both short-term and long-term trading. In order to avoid loss in trading most of the well-known analyst advice investors to trade always with the stop-loss order.

what is stop loss in stock market

Along with advantage stop-loss order also carry disadvantage. The points are as follows:

  • It avoids the need for constant monitoring the stock price in the market.
  • Stop-loss is basically a protection to save you from excessive losses.
  • It is a buy or sells order which gets triggered automatically by broker/agent.
  • You can place the stop-loss limit according to your wish.

Besides these, there are also some negative points, such as:

  • Short-term price fluctuation can trigger SL order frequently. Wide price fluctuations can also cause a problem.

Points to Remember:

Though there are lots of investors who trade with SL, few of them set the SL price after a proper analyzation but rest of them just put a random figure according to their wish. Those who technically analyze the market movements correctly and set a price near the amount or at the upcoming supporting level are the true utilizer of SL order.

For example, suppose you have bought a stock at Rs. 100 and after analyzing the market, you assume that the support level is at 98, you set the stop loss limit below that point, say at 97. In this way, the probability of incurring loss will be minimized.

Therefore it is advised to analyze the market properly prior to set SL limit. It not only protects you from incurring great loss but also saves your time from constant monitoring the stock price in the market.

Ankita is a graduate in English language and she has also done her MBA from the Calcutta University. She has a high knack in the stock markets. An experienced stock market content writer Ankita is also trading on her own account. Ankita is also preparing for the NISM Research Analyst Series XV examination seriously.



Categories: Stock Market Basics

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