What Is a Stop Loss Order and When to Use It?
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Stocks can be tricky, especially when the market is bouncing around all over the place. Whenever you invest your hard-earned money, you want to make sure it is benefiting you. When stock prices fall, you lose money, plain and simple. The main goal is to avoid losing money and that is where a stop loss comes in.
Creating a Stop Loss
In order to reduce the risk of losing your entire investment, many people will create a stop loss order. This is an order to your broker to sell the stock if it falls to a certain price in order to protect you from losing more money than you can afford.
Here’s how it all works: If you were to purchase a stock at $100 and you want to make sure that yo don’t lose more than 5%, you would create a stop loss order for $95 or below. If the stock falls to $95, your broker will automatically sell your stock at the best market price it can get at that particular time.
There are several reasons why a trader would use a stop-loss order, but the most common one is that most traders don’t have time to sit around and monitor the market all day long. It gives you the ability to carry on with your day without the worry of losing your entire investment because you are at work.
An investor might also like this tool because it removes emotion from the equation. It doesn’t allow you to overthink a sell. Peoples attachment to their money can be an emotional trigger which results in poor decision making and eventually loss.
Money is a tool used to buy things that make you more or make your life easier or gives you more time. Creating a stop loss is a way to help do this in an industry that requires both discipline and patience to succeed.
All investors should create a stop loss order immediately after purchasing their stock. It is not recommended that your order should be any less than 5%. This will help you to avoid selling during normal fluctuations in the market throughout the day.
Most stocks will have this normal fluctuating throughout the day and if you have done your analysis correctly, your stock should grow and you wouldn’t want to miss out on gains because you sold too early. Most of your stocks should make you money, but not all stocks can be winners and this is what the stop loss is for.
When creating your stop loss order, it is important to note to set the order at a common price. Do not set it at an obscure dollar amount that the stock may not ever reach, it is best to set it at a price that is divisible by a quarter.
When A Stop Loss Order Might Not be Helpful
If you are a very active trader with your account, then it might not be worth your time to set a stop loss order. It may not be in your best interest to set up a stop loss order if you are constantly monitory your account because you know if your stock is closing in on the threshold you are willing to lose.
If you are monitoring the stock that closely, you may see that it is just a normal market fluctuation that a stop loss order would sell on but you know it is going to bounce back. This allows you to protect your stock position from abnormal market fluctuation.
With all of the online brokerage accounts today, this has become much easier for the everyday trader to accomplish. Most of these platforms offer you the ability to set price alerts that will let you know when your investment is getting close to your sell price which allows you to evaluate your position real time.
When Should You Use A Stop Loss Order
If are going on vacation or are going to have limited access to your brokerage account is the best time to implement this strategy. Any time that you can’t receive your alerts and access your account within a matter of minutes, it is probably smart to have a stop loss order in place.
The objective of investing in the stock market is to make money, not lose it. Think of a stop-loss as an insurance policy against falling stock prices.
