Published on June 28, 2013
DemystifyingStop Loss Importance of Stocks
How to Quickly Lose Money on the Stock Market? Ignore the Stop Loss Feature • David got that brilliant tip from a stock market tipper & the confidence the tipper exuded in the performance of the scrip had already got him excited. • He was now eager to try his luck with the scrip the moment the market opened and hoped to make a killing by the end of the day. • Fate, however, had something else in store for him.
Here’s How David Lost Money • To make the profits look even better, David decided to use the leverage trading facility. • He had Rs. 10,000 in his trading account and because he opted to do leverage trading, his broker allowed him to buy stocks worth Rs. 40,000. • He ended up buying 20 shares worth Rs. 200 each of particular scrip. • Now as luck would have it, the share price plummeted by Rs. 10 and David in the bargain lost Rs. 2000 in just a single trade.
Here’s How David Lost Money • And such was his confident in the tip and the tipper that he didn’t bother to apply a stop loss because he never ever considered the fact that the stock might actually tank. • Fortunately in David’s case, he thought of investing only Rs. 10,000 which by no means is a small amount but imagine the situation had he opted to invest a bigger amount. • His losses would have been much higher that what it is presently.
Stop Loss Feature – A Trader’s Best Friend • The Indian share market just like any other market around the world can be quite unpredictable and when it comes to timing the market, even the most seasoned players have ended up losing fortunes. • While market or stock movements can continue to remain highly unpredictable and sometimes volatile, traders who chose to play safe and deploy smarter strategies are the ones who make real money and when it’s time to face a loss-making scenario, again they are the ones who exit with negligible losses.
An Example to Remember • Vishal Shah, who’s has been trading on the BSE since he was 20, never goes into a trade without applying the stop loss feature even if everything on the bourses show green. • He says despite their being fairly easy and convenient options available in the online trading software to set stop losses, most people feel too lazy to set it thinking that the market is unlikely to reverse the positive trend. • The fact of the matter, however, is that you can never be sure. • So for Vishal, no matter how big or small the trade is, he ensures that he has applied a stop loss.
What Should Be the Ideal Stop Loss Margin? • The next question on everyone’s mind would naturally be how much should be the margin of stop loss. • This, however, can differ from person to person and generally depends on an individual’s risk appetite. • Experts recommend the ideal stop loss margin at 710% for short and medium term traders. • For day traders, they need to put up a much more aggressive stop loss possibly in the range of 0.5 to 1%. • So the next time you try and execute a trade in the markets, be sure to apply the stop loss. •You never know which way the markets would turn.
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