Share Market

An order to buy or sell a security when the price of the security goes above or below a specified price is called a stop order. It is a mechanism that entitles the trader to stop the sale of his securities when the price of a stock goes above or below a specified price. This is used to limit the loss of a trader. Once the stop price for a security is reached then the stop order is entered as a market order. This order is executed automatically when the stop price is reached.

Types of stop loss order:

1) Stop loss limit order: this is to buy at no more or sell at less than a specified limit price. This is to control the price at which the trade is executed. They are two types:

a) Stop loss buy limit order: is executed at the limit price or lower.

b) Stop loss sell limit order: is executed at the limit price or higher.

Example: let there is a customer who is short but he does not want to pay more than 50 Rs. for the stock, then, the investor can place a stop loss buy limit to buy the stock at any price above up Rs. 50

The customer gain is that the customer has total control of the stop loss limit. The disadvantage is that, that at the limit price the stop order will not be executed if there are no buyers.

2) A stop loss market order: is an order to buy or sell a security once the price of a security has climbed above or dropped below a specified price. There are two types of stop order:

a) Sell stop market order: order to sell at the best price after the stock goes below the short price.

b) Buy stop market order: happens always when the buy stop price is above the current market price. A disadvantage of a stop order is that the trader has no control over the price of the transaction.

The stop loss does not cost anything to implement. After the stock is sold only then the commission is charged. It minimizes the ‘total loss factor’ to considerable extent. A stop loss is a very useful tool to lock in profits or prevent excess losses. To any investor, the advice is, use stop loss as much as you can. Stop loss depends on two things i.e. how much the trader is ready to lose and the price movements for that particular day.

Example:

Let us say that a trader asked the broker to put a stop loss at 333. This means that the broker placed and order for selling the stock at one condition -if it breaches a trigger price. Hence, for a stop loss sell order for 333 the trigger will be slightly higher. Let us assume that the stock is quoting at 335. You place a stop loss sell order at 333 with a trigger price of say 333.25. When the price reaches 333.25 or below the stop loss sell order get activated or triggered. The order will be placed as a sell order for 333. But if the price starts moving up say from 333.10 to 334 the order won’t be executed.