By setting a predetermined exit point, they can reduce the emotional stress of monitoring their investments and make rational decisions based on their investment plan.Īn investor researches and sets a limit as per the previous market performance of the share typically below the current market price for a long position or above the current market price for a short position. Stop loss orders can help investors manage these emotions and avoid making impulsive decisions based on fear or greed. Most of our decisions are based on our emotions but in the stock market, these emotions can mean financial ruin.

This helps in maintaining discipline and sticking to investment goals and strategies even in a volatile market condition. Using a stop loss strategy, investors and traders can limit their potential losses which reduces the risk of holding a losing position. Stop loss orders play a crucial role in risk management in the stock market. This helps traders avoid larger losses if the price of the security continues to drop. It works by automatically selling a security when its price reaches a certain level, known as the stop price. Stop Loss MeaningĪ stop loss is a type of order that investors or traders use to limit their potential losses in the stock market. Tools are essentially different orders you can place with your brokerage company to protect yourself like “take profit”, “boundary options”, “hedging” and “stop loss”. There are a host of safeguards available to investors today to not only understand the market but also invest well and manage risk well.

Investing in the stock market comes with risks.

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