Setting Stop Loss When Purchasing Shares: A Comprehensive Guide

When purchasing shares, one of the most critical decisions is determining the appropriate price at which to set your stop loss order. A stop loss is designed to protect your investments from excessive losses by automatically selling your shares if the stock price falls below a predetermined value. This article will explain how to set a stop loss order and discuss the importance of using this tool as part of your investment strategy.

Understanding Support Levels

Before setting a stop loss, it's important to identify the support level of a stock. The support level is a price range at which buying pressure is expected to offset selling pressure, often indicating a potential low point where the stock may stop declining or may start to rise.

Example with HDFC Bank

Let's take the example of HDFC Bank. Our analysis suggests that the stock might rise, prompting us to buy it at the current market price of 1525. On the chart, we identify the support level at 1505. To mitigate potential losses, we set a stop loss at 1500.

This means that if the share price falls to 1500, a sell order will be placed to limit our losses.

Types of Stop Loss Orders

There are two primary types of stop loss orders depending on the level of control you want over the sell price.

Stop-Loss Limit Order (SL order)

In an SL order, you set both a trigger price and a limit price. The trigger price is the price level at which the order becomes active, while the limit price is the maximum price you are willing to sell your shares at.

Stop-Loss Market Order (SL-M order)

In an SL-M order, you only set a trigger price. When the trigger price is hit, a market order will be placed to sell your shares at the current market price, offering less control over the selling price.

Let's examine these types of orders through an example. If you hold a buy position at 100 and wish to place a stop loss at 95:

Case 1: SL-M Order

For a sell SL, you enter the trigger price as 95. If the price reaches 95, a sell market order will be sent to the exchange, selling your shares at the prevailing market price.

Case 2: SL Order

For a sell SL, you enter both a price and a trigger price. For example, with a range of 0.10 (10 paise), you might set a trigger price of 95 and a price of 94.90. This ensures that once the trigger price is reached, your order will be executed at or near the limit price.

Benefits of Using Stop Loss Orders

A stop loss order can significantly enhance your investment strategy by:

Protecting against unexpected market downturns. Maintaining discipline in following your predetermined risk management rules. Limiting potential losses to a predefined amount. Enabling you to average down or add to your position once the price falls to your stop-loss level.

Conclusion

While setting a stop loss is not mandatory, it is strongly recommended, especially for novice investors or those looking to manage risk. Properly placing a stop loss order can help you navigate volatile markets and safeguard your investment portfolio.

Resources for Further Learning

For more detailed information and tutorials on stop loss orders, you can refer to the Google Finance educational resources or seek guidance from a financial advisor.

Do you have any questions or need further clarification on stop loss orders? Share your thoughts in the comments below to get the latest insights and stay updated on market trends.