Stock / Share Market
by 5paisa Research Team Last Updated: 2023-01-31T18:08:49+05:30

Stop Loss Trigger Price and Why you Should Use it?

It is an order to purchase or sell a particular stock at a specified price made with a broker that is known as a stop-loss order. Using a stop-loss order helps investors avoid incurring significant losses on a particular securities holding. Limiting your loss to, say, 10% of the purchase price will keep your overall loss to a bare minimum.

In many ways, stop-limit orders and stop-loss orders are interchangeable terms. As their name implies, they will only execute at a certain price. A stop-limit order specifies two prices: a stop price, which turns the order into a sell order, and a limit price, which prevents the transaction from being executed.

Instead of being a market order to sell, the sell order becomes a limit order that may only be executed if the price is below the limit. (or better).

Why Should you Use Stop Loss Trigger Price?

Stop-loss orders have the major advantage of being free to use. Once the stop-loss price is reached and the stock must be sold, and a normal fee will be payable. Stop-loss orders may be seen as free insurance policies.

A stop-loss order also has the advantage of removing emotional factors from the decision-making process. Stocks have a tendency to make investors "smitten." A common misunderstanding among new investors is this: If they give a stock one more shot, it will turn around. It's possible that this extra time may simply increase your losses.

Any investor should be able to quickly and readily identify why they hold a certain asset. The criteria of a value investor will vary from those of a growth investor, who in turn will differ from those of an active trader's criterion. Whatever your approach, it will only be effective if you stick to it.

Stop-loss orders are almost worthless if you're a buy-and-hold investor who insists on holding onto your investments. When it comes down to it, confidence in your approach is key to becoming a successful investor. In other words, follow through on your plans. Stop-loss orders have the benefit of keeping you focused and preventing your judgment from being swayed by emotion.

The last thing to keep in mind is that placing stop-loss orders does not guarantee a profit in the stock market; you must still make sound investing choices. Otherwise, you risk losing as much money as you would if you hadn't used a stop-loss (only at a much slower rate).

Stop Loss Trigger Can Help you Book Profits

Orders with a stop-loss are often thought of as a method to limit one's losses. Nevertheless, this technique may also be used to ensure that gains are protected in the long term. A "trailing stop" is a stop-loss order that is used in this situation.

In this case, the stop-loss order is placed at a percentage level below the current market price (not the price at which you bought it). Stop-loss prices vary in response to stock price changes. In the event the stock price rises, you'll have an unrealized gain.

This money won't be in your hands until you sell. It's possible to let profits run by using a trailing stop, but you'll be sure to experience some capital gain at the same time.

Disadvantages of Stop Loss Trigger Price

A stop-loss order has the benefit of not requiring daily monitoring of a stock's performance. This benefit comes in useful when you're away on vacation or otherwise unable to keep an eye on your portfolio for a prolonged length of time.

However, a short-term price movement in stock may trigger the stop price. The idea is to choose a stop-loss percentage that enables a stock's price to vary on a daily basis while also limiting the stock's potential downside.

The ideal approach may not be to set a 5-per cent stop-loss order on a stock with a history of 10 per cent or greater weekly fluctuations.

Stop-loss levels aren't set in stone; instead, they're based on your own investment approach. As an active trader, you could use 5%, but as an investor, you might use 15% or even more.

Another thing to bear in mind is that your stop order will become a market order after you've reached your stop price. Selling at a significantly higher or lower price than the stop price is possible. Especially in a fast-moving market, where stock values may move very quickly, this is particularly true

Wrapping Up

It's amazing how many investors fail to take advantage of the basic stop-loss order. Almost all investment types may benefit from using this technique, whether to avoid excessive losses or to lock in gains. Stop-loss orders are like insurance policies: You hope you'll never need it, but peace of mind comes with knowing you're covered just in case.

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