What is stop loss order?

Can you give me an example and explain this term pl? Also what is Regular lot and how is this associated with stop loss? I am new to shares. So pl explain accordingly.

For any and every New Entrant to the Stock Market, the words “Stop Loss” always confuses. More so, when one finds the levels of the prices for Stop Losses while either buying or selling, leading him to a definite Loss.

This wrongly worded term “Stop Loss” actually means “Limit your Losses”

For example, you buy a stock @ 100, anticipating that the markets boom and this stock shall reach, say 120, what actually happens is otherwise. Consider that markets fall drastically, and this stock reaches a level of say, 78 , then the buyer is totally confused about the fate of his/her investment, and also is worried about the losses getting generated.

In such a case, a Stop Loss order is advised to be placed either while placing the above mentioned buy order, say at 95, so in the event one’s judgment about the direction of the market is incorrect, one’s losses are limited because the buy at 100 is automatically squared off at the stop loss price of 95, when the stock reaches that level.

This limits the loss per share to Rs 5 plus the brokerage and Taxes/levies as applicable. But in absence of such order, and when the stock falls to ay, 78, the loss per share is already Rs 22 plus the buying brokerage and taxes/levies as applicable for buying, and yet additional losses shall get generated as selling brokerage and taxes/levies applicable while selling.

Had there been a stop loss order, buy at 100 would have been squared off at 95, and the buyer had an option of buying the same stock when it falls to 78.

There are two variations exist. First, instead of entering the Stop Loss order while placing the buy order, one has some stop loss level in mind, and one then executes a sell order manually if and when the stock price falls to that level. The second is expected to be rare. There are cases, when one has entered the stop loss order while placing the buy order, but as the stock price fell down and passed the stop loss price, the automatic triggering of the stop loss order did not take place, and the person suffered as if he/she had not entered the stop loss order at all.

To take the best advantage, one should merge the two, and enter a stop loss order and also remain vigilant to note that it triggers if the markets fall.

The stop loss order is also applicable for selling. Taking the same example, if one expects the markets to fall and therefore wishes to sell his stocks and the current price is say, 100 where one places the sell order, a stop loss at say, 105 may save the losses is the market does not fall, but moves up, pushing the stock price to 120.

Because, if one sells at 100 and the price rises to 120, one feels unhappy. The stop loss order at 105 squares off the sell at 100, so one is still in possession of the stocks and can now sell them at 120

Therefore, the meaning of “Stop Loss” order is actually to limit one’s losses if one’s anticipation of the market trend turns out to be incorrect. In my opinion, this term “Stop Loss” must have resulted years ago when the brokers themselves were trading in the trading ring, and were not required to pay their own brokerages. I wonder, what kind of taxes/levies existed then, and I doubt if there were any. So, for a broker, it really was a “Stop Loss”. However, the term is being used now by everyone, even if the times have changed.

In the above example, 100 was a representative figure for a spot price of a stock and 95 & 105 were representative stop loss levels, assuming one considers stop loss at 5%. In reality, the stop loss levels get refined with the experiences. To start with, one could take guide lines from either one’s broker or from one’s friend involved in stock trading.

Cheers!
SS

A conditional order placed with stockbroker to close one's position if the market drop to a specified price level.