Stop-Loss Order: Minimize Your Loss
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Until you sell your stock, you do not make money, be it at a profit or loss. That makes selling one of the most important things for any investor, yet it is also one the hardest things to do. Factors like ego, insufficient knowledge and emotional attachment makes it difficult for investors to sell, 
specially at the right time. But even bigger factor why investors do not sell at the right time is due to lack of exit strategy. Many investors enter a trade without any idea of what their exit strategy is. They more likely take premature profits or worse, let their losses run to the downside, at times completely burning their portfolio. To be successful investor, one must understand what exits are available to them and know how to create an exit strategy that will help minimize losses and lock in profits. One such strategy is the stop-loss order.
What Is a Stop-loss Order?
Stop-loss order is simply an order placed with a broker to sell off the stock at a set price level. A stop-loss is designed to limit an investor's loss on a stock. Generally stop-loss orders are placed at prices that give an indication that an exit is the best move to make at that time. What price level to set the stop-loss order would depend on the type of investor (ie. value investor, growth investor or day trader)
Stop-loss Order Example
Let us go through a quick example to understand it better. Say Mr X purchased stocks of Danger Inc. at $100 per share. Mr X put a stop-loss order of 10% below the buying price (ie. $90 per share). If the stock price of Danger Inc. falls below $90, the stop-loss order Mr X placed will be executed and the stocks will be sold off. Is it foolish to sell off below the purchase price and take a loss ? Yes and no. If the price of Danger Inc. would have fallen to $80, Mr X would have accumulated a bigger loss. Setting a stop-loss order for 10% below the buying price will limit the loss to 10%. In this case, Mr X decided to minimize his loss and move on to a profitable investment.
Advantages of Stop-loss Order
Minimize Loss: Provides a safety net and helps limit the loss only to a certain level rather than taking a big hit.
What Is a Stop-loss Order?
Stop-loss order is simply an order placed with a broker to sell off the stock at a set price level. A stop-loss is designed to limit an investor's loss on a stock. Generally stop-loss orders are placed at prices that give an indication that an exit is the best move to make at that time. What price level to set the stop-loss order would depend on the type of investor (ie. value investor, growth investor or day trader)
Stop-loss Order Example
Let us go through a quick example to understand it better. Say Mr X purchased stocks of Danger Inc. at $100 per share. Mr X put a stop-loss order of 10% below the buying price (ie. $90 per share). If the stock price of Danger Inc. falls below $90, the stop-loss order Mr X placed will be executed and the stocks will be sold off. Is it foolish to sell off below the purchase price and take a loss ? Yes and no. If the price of Danger Inc. would have fallen to $80, Mr X would have accumulated a bigger loss. Setting a stop-loss order for 10% below the buying price will limit the loss to 10%. In this case, Mr X decided to minimize his loss and move on to a profitable investment.
Advantages of Stop-loss Order
Minimize Loss: Provides a safety net and helps limit the loss only to a certain level rather than taking a big hit.