Everything You Need To Know About Stop-Loss Orders and How They Work. | HDFC securities
What is Stop Loss and Stop Loss Order?
If you fear that prices of stock may move against your trade and cause you a more loss than what you are ready to take, you can place an order in advance to buy or sell the stock at a predetermined price. This is called a stop-loss order. For instance, if you have bought a stock at Rs 100 and you want to limit the loss to Rs. 5 per share, you can place an order in the system to sell the stock as soon as the stock comes to 95. Such an order is called 'Stop Loss Sell Order. Let us take one more instance. If you have a short position in a stock at Rs 100 and you want to limit the loss at Rs. 5 per share, you can place an order in the system to buy the stock as soon as the stock rises to 105. Such an order is called Stop Loss Buy Order.
What are Stop-Limit Orders?
Stop-limit orders are similar to stop-loss orders, but they come with a limit. There are two prices specified in the case of a stop-limit order, a stop price or Trigger Price and a limit price. When the stock reaches a specified price, it triggers the trade as a limit order and trades only at that price or better. For instance, if you have bought a stock at Rs 50 and you want to limit the loss at 45. You will place a Sell Stop Loss order with Limit price and trigger price. Since your order needs to be triggered first, the trigger price is greater than the limit price. Here, this order type gives you a range of the Stop-Loss. Let us assume a range of Rs 0.10 (10 paise). Here, you can keep trigger price = 45 and Limit price = 44.90. When the price of 45 is triggered, the sell limit order is sent to the exchange and your order will be squared off at the next available bid price above 44.9. So, your Stop Loss order may get executed at 44.90 or higher but not below 44.90.
Advantages of Stop-Loss Orders:
Stop-loss orders are perfect for investors or traders who wish to avoid the pressure of monitoring stocks daily and limit losses lock in gains. The limits are decided upon in advance, and the trade gets triggered automatically. Moreover, stop-loss orders prevent emotions from getting in the way of stocking buying or selling. It prevents losses from mounting and allows you to make the most optimal trading decisions minus any feelings. While we agree that the stock market is all about taking risks, one should know where to draw the line. Stop-loss orders minimise losses and help maintain the balance between risk and reward.
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