• HDFC securities
• 20 Jan 2023
• Knowledge Centre

The stock market can be a volatile place. Understanding the potential risks and how to manage them is an essential part of trading in the stock market. One of the most important features of risk management in the market is a stop loss tool that helps minimize potential risks and protect your trading capital.

What is Stop Loss?

For new traders, knowing what is stop loss order is of utmost importance. Many novice traders can end up making large losses in their trading journey due to poor position sizing, overleveraging, and not using a stop loss. Hence, it is essential to understand stop-loss, a popular risk management tool used by traders and investors to limit potential losses in a stock or other security.

A stop loss is a buy or sell order which automatically triggers after a certain price is touched and closes the position. It is a trading strategy used to limit losses by exiting a trade at a predetermined price level when the market moves against your position.

A ‘Sell’ stop loss order is used if the trader has taken a long position whereas a ‘Buy’ stop loss order is used in the case of a short position. The main function of a stop-loss order is to limit the losses in a particular trade if the price moves against the position.

Types of Stop Loss Orders

Stop Loss Market Order

A stop loss market order is an order in which a buy or sell order is placed at the market price once the stop loss level is triggered. Many share market apps offer this functionality, making it easier for traders to manage their positions.

For example, if shares have been bought at Rs 50 and the stop loss level is at Rs 47. As soon as the shares start trading at 47, a market order to sell shares is placed.

Stop Loss Limit Order

A stop loss limit order is a fixed stop loss in which a stop loss order is triggered after a certain price before it is executed at the decided price.

For example, shares have been bought at Rs 50. The trigger price for the stop loss limit order is Rs 47 and the stop loss price is Rs 46.80. Once the price of the shares touches Rs 47, the stop loss order is triggered, and it will get executed between the trigger price and the limit price of the stop loss. This helps in avoiding the slippages of a market order.

Trailing Stop Loss

A trailing stop loss is a great tool to stay in trades for longer and take away a certain amount of money. As the name suggests, a trailing stop loss moves closer to the current market price in order to limit the losses or to make sure a certain amount of profit is booked. This is helpful if a trade moves in your direction.

Knowing what is stop loss in share market can be a great way for traders and investors to limit losses. Stop loss orders provide an automated and quick way to close positions and it eliminates human errors to some extent as well.