Understanding The Stop Loss In Stock Trading

Share markets are very volatile. There is a huge risk when you invest in the share market. The investor gets emotionally attached with the stocks he has invested. When the stocks are moving up, the emotion does not cause any harm. But when the stocks move down, it leads to the losses. As an investor you cannot bear more losses. There is some point at which the stock is expected to move further down causing you more losses. Hence it is wise to selling the stock limiting the losses. It is often found that investor keeps the stocks in a hope that they will rebound. This is why you should use stop loss when you place the order.

What Is Stop Loss?

Stop Loss is a trigger price beyond which the stocks and hence their losses should not be bear. The stop loss is known as the emotion remover. Using Stop Loss is one of the most suggested ways to invest in the stock market.

For example say if you are buying 100 shares of company ABC which is 3000INR/share when you are placing the trade. You expect the share price to go up. However, the share price of company move the other way. Let us say you can afford the losses only to 50INR per share. When you enter the stop loss in the order, the stock gets converted to a sell once the price reaches your stop loss. Once the stock moves below this price, the stock is sold thereby limiting your losses. The same principle holds good when you want to short the share.