What Is a Stop Loss

It must have happened that you bought a stock at Rs.400 and the stock price went to Rs.395. You decided to wait and it dipped further to Rs.390. Being an intraday trade, you closed the position in a hurry at Rs.390 and booked a loss of Rs.10. In stock market, you don’t control the price, but you can control risk. That can be done through a stop loss.

What is stop loss in the share market and how to set a stop loss? You must have heard the term stop-loss quite often but must be wondering about the stop loss meaning. Here is a quick primer on what is stop loss, what is stop-loss order, and how and when to set stop loss. Understand stop loss meaning as insurance against trading risk.

A Stop Loss: What It Is

What if you buy 1000 shares of a stock at Rs.200, but are only willing to lose Rs.5,000 on the trade. The answer is to set a stop loss at Rs.195. If the stock goes down to Rs.195, stop loss is triggered and your position is closed. Yes, you made a loss but you protected your capital by restricting your loss to just Rs.5,000. That is why stop loss is like insurance. You don’t make money with stop loss but you protect your capital and enhance your longevity.

Now for the brass tacks. Look at a buy order stop loss for now. A Stop-loss order is a sell order placed to limit the losses when you fear that the prices may move against you. For instance, if you bought a stock at Rs.250 and you want to limit the loss to 244, you can place a “stop-loss” order in the system to sell the stock as soon as it comes down to 244. The stop loss level is decided based on technical support levels or affordability of loss.

Broadly, there are 2 types of stop-loss orders.

• Stop-Loss Limit order (SL); which has Price + Trigger Price
• Stop-Loss Market order (SL-M); which only has Trigger Price

Let us now understand these two types of stop-loss orders in greater detail.

Let us look at a stop-loss order for a buy position

Let us get back to our previous example, You bought the stock at Rs.250 but don’t want to hold the stock if it goes below Rs.244. Let us look at how it will work in the case of a stop loss – market order (SL-M) order and in the case of a plan stop loss (SL) order.

1. In the case of an SL-M order, you just select and place “Sell SL-M order” and you can set the trigger price of the order at Rs.244. If the stock touches the price of Rs.244, the sell market order or SL-M order will be sent to the exchange and your position will be squared off at market price. Of course, your actual execution maybe a few bids away, depending on the liquidity.
2. What happens in the case of a plain stop-loss order or SL order. In this case, you will place a Sell SL order with price and trigger price. The order needs to be triggered first, the trigger price can be set at Rs.244 and the worst case price at Rs.243.50. The implication here is that when the price of Rs.244 is triggered, the sell limit order is sent to the NSE. The order is squared off at the next available bid. It can be anything above Rs.243.50 but not below Rs.243.50.

In the case of stop loss for sell orders, the process is exactly the opposite. You set a stop-loss order as a buy order, in that case, Everything else is just a mirror image of the buy SL order.

What is the procedure for placing Stop Loss Orders

Here is the process to follow for the stop-loss order.

• Set stop-loss based on the order. If a buy order, then a stop-loss order will be sold order, and if it is a sell order then a stop-loss order will be a buy order.
• Decide the stop-loss price, it can either be based on technical support levels or it can be based on how much you can afford to lose.
• Decide on whether you want to place an SL order or SL-M order. That is at your discretion.

What is Equity Trading

Equity trading or stock trading is the buying and selling of equities in the market using your trading account. You can trade equities for intraday or delivery, depending on your choice of trade.