What are stop loss orders and how to use them?
Using
stop loss appropriately can make a pretty tremendous difference in your
investments. Stop loss is a tool that can be used by almost everyone. It is
also used to buy or sell a stock when it breaches a certain price which is
called the trigger price.
What is Stop loss?
A
stop-loss order instructs a broker to buy or sell a particular stock at a
certain price once it reaches that price. A stop-loss order is used to keep an
investor's loss on a security position to minimum. For example, setting a
stop-loss order 10% below the price at which you bought the stock will restrict
your loss to 10%. Setting a stop loss at
Uses and Advantages
·
The most important advantage of a stop-loss order is that it
is inexpensive to use. Only when the stop-loss price is reached and the stock
must be sold is when you are charged.
·
• Another benefit of a stop-loss order is that it removes
emotional concerns from the decision-making process. Stocks have a tendency to
make people "fall in love." They may hold the false assumption that
if they give a stock another chance, it will turn around. In actuality, this
delay may elevate losses.
·
Stop-loss orders have the advantage of keeping you on track
and preventing your decision from being affected by emotion.
·
Stop-Loss Orders can also
be used to secure profits. Stop-loss orders have long been looked of as a tool to guard
against losses. . This strategy, on the other hand, can be utilized to lock in
gains. Stop-loss orders are usually referred to as "trailing stops"
in this case. The stop-loss order is set at a percentage below the current
market price in this scenario (not the price at which you bought it). The
stop-loss price varies as the stock price fluctuates.
Takeaway
Despite
the fact that a stop-loss order is a simple tool, many investors do not use it
to its maximum potential. Almost all investing approaches can benefit from this
strategy, whether it's to avoid excessive losses or to lock in profits. As an
example of an insurance policy, consider a stop-loss: You hope you'll never
need it, but knowing you're insured in case you do is comforting.
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