Why Is It Important to Place Stop Loss When Trading in Shares?

Planning

oi-Sunil

By Sunil Fernandes

Published: Wednesday, February 11, 2015, 8:57 [IST]

If you are regularly trading in shares and not placing a stop loss, it could be a disastrous proposition. Your losses could simply mount and you could end-up with very high losses.

Now, let's give you a simple example. Say you bought 500 shares of Punjab National Bank at a price of Rs 500. The total cost of the acquisition would be Rs 2.5 lakhs. Now, you can sell the same if you make a profit.

But, if the stock falls, you can restrict your losses and that is by placing a stop loss. Let's say that you place the stop loss at Rs 495. What this means is that the bought shares would be automatically sold at Rs 495, thus your loss would be limited to Rs 5 per share or Rs 2500 in total.

What Happens If You Do Not Place a Stop Loss?

If you do not place a stop loss your losses could be colossal. For example, in the above example if the stocks dips below Rs 495 and ends up at Rs 480, your loss could be Rs 20 per share or Rs 10,000 as against the loss of Rs 2500 if you had to place a stop loss.

It's important to remember that you need to place a stop loss simply to protect against very serious losses.

The loss can be very high if you are dealing in the futures segment of the market because the quantities involved are rather huge.

How To Place a Stop Loss When Dealing With Shares?

While dealing in shares you can either place the stop loss directly if you are trading through the internet. On the other hand you can simply ask your broker or tell the dealer that you are dealing with at the broking firm to place the stop loss on your behalf. In either case the same needs to be done.

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