What is a Stop-Loss Order

A stop loss order is an instruction to close a position when a security reaches a particular price, called the stop or trigger price. Traders can limit their losses by using a stop-loss order and is automatically executed once the security price hits the trigger price. An essential component of trading and risk management is stop-loss orders. When the market is experiencing a significantly higher degree of losses, you can utilise them to keep your losses to a specific amount. To explore more about what is stop loss order meaning, importance and much more, keep reading this article ahead.

Example of Stop Loss Order

The purpose of a stop loss order is to restrict losses when there is a fear that prices will go against the deal. For example, if a stock is bought for Rs. 100 and the maximum loss is Rs. 95, an order can be made to sell the stock as soon as the price hits Rs. 95. The order will be automatically executed when the stock price is Rs. 95. So, the trader will suffer a loss of Rs. 5 only.

Open Demat Account

Your first step to enter share market

Get Started

* By signing up you agree to our Terms and Conditions

How Does a Stop Loss Order Works?

When a security's price hits a specific threshold, the stop loss order immediately initiates the process of selling that investment. It's known as the stop price. Therefore, when a trader chooses to place a stop loss order, he or she must choose a particular price (the stop price) at which the order will be activated. The stop loss order now tends to become a market order if the stock price tends to reach the stop price.   

The primary use of this tool is to restrict possible losses if a stock's price is on the decline. It's important to keep in mind that stop loss orders don't guarantee that an order will be executed at the stop price. Moreover, the actual price at which the order is executed can differ.

Importance of Stop-Loss Order

The importance of stop loss order is as follows. 

• People can efficiently manage their losses with stop-loss orders without having to keep a close eye on the market.
• It is especially advantageous for people who are risk averse and want to minimise their exposure to market swings while still making sizable gains from stock market investments.
• Since it is impossible to predict the maximum or lowest value in advance, stop loss trading also enables people to quit a position before it reaches its peak. Therefore, a price change might result in large capital losses if an investor holds their position for a long time to generate larger returns.

Stop-Loss Order Vs Market Order

The difference between a stop loss order and market order is as follows.

Types of Stop-Loss Orders

Stop-loss orders in the stock market are of two kinds, as mentioned  below.

1. Fixed Stop-Loss Order

A fixed stop-loss order is a type of stop loss order which is triggered when a security reaches a predetermined price. They are frequently utilised until the trade is placed and can even be time-based. When the shares are appropriately sized and positioned, investors use time-based fixed stops to prevent significant price fluctuations.

2. Trailing Stop-Loss Order

A trailing stop-loss order offers investor protection and net profit while acting as a buffer against an unanticipated decline in the share price. This order is determined by the percentage of the overall price and the sale order if the market drops below the level of demand. On the other hand, the trailing order rapidly changes to a complete increase in market valuation when the share price rises.

Advantages and disadvantages of Stop Loss Order

The advantages and disadvantages of stop loss order are as follows.

Conclusion
A stop loss order is an automated instruction set in the trading platform to execute an order when a security touches a certain price. When utilised properly, a stop-loss order is a simple tool that can provide several benefits. This tool is useful for almost all investing methods, whether the goal is to lock in profits or avoid excessive losses. In stock trading, consider including a stop loss in your risk management strategies. To start trading safely without any hassle, go ahead with a reliable stock trading app that offers access to all the essential trading tools.