What Is Triggering A Stop Loss When Trading In Shares?

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For regular share traders placing a stop loss is a must, given the fact that trading can be a highly risky proposition.

What Is Triggering A Stop Loss When Trading In Shares?
What Is A Stop loss?

The best way to know what a stop loss would be is to give an example. Let's say you buy 1000 shares of Reliance for Rs 800. Now, if the stock rises to Rs 810, you sell the same making a profit of Rs 10,000. That's always a good scenario to be in.

Now, let's look at a different scenario. Let's say in the above example, the share price drops to Rs 990 and you place a stop loss at Rs 790, you restrict your loss to Rs 790. A stop loss is a mechanism where you place a buy order automatically to avoid further loss.

Now, what happens when you do not place a stop loss. If the share price of Reliance dips to Rs 780, you incur a further loss of Rs 20,000 and if it dips to Rs 770, a loss of Rs 30,000.
What stop loss does is that it prevents any further losses. You can place a stop loss either when you are going long or short.

Stop Loss When Going Short?

You can also place a stop loss when going short. For example, if you sell Reliance at a price of Rs 800, you may want to place a stop loss at Rs 810. When the price reaches Rs 810 the stock is bought and this is how a stop loss is actually triggered.

This is what is called triggering a stop loss when trading in shares.

It's extremely important to place stop loss in order to avoid making losses in the market. It helps to prevent collosal losses when trading in shares. Normally, a stop loss order can be placed immediately when you buy or sell a share. There is a mechanism to do so, if you are trading online.
You can seek the help of your broker for further details.

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Read more about: shares, stop loss
Story first published: Saturday, March 28, 2015, 10:39 [IST]
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