In simple words, Stop Loss is stopping your loss from getting bigger.
For example, you buy a share at ₹ 500. There are only two possibilities now. Either the share price will go up or it will fall. You would obviously want the price to go up, but if it falls – you do not want to lose more than ₹ 10. In that case, you can sell your share at ₹ 490.
This process of restricting or limiting your loss is called Stop Loss.
Importance of Stop Loss
You cannot make a lot of money in the stock market – without losing some money. If you cannot take losses, it’s better you stay away from the market because loss is an inevitable part of investing or trading.
Even the most successful investors have made wrong investment choices. Expert traders can go wrong with their decisions. This is what makes Stop Loss extremely important, especially for traders.
If a stop loss is set before entering an intraday trade, it give traders more control over their trade. The difference between your buying price and stop loss – is the hit you are comfortable taking, before the loss gets bigger.
Stop Loss may not be as important for long-term investors, but not letting your loss from getting very big is important – especially in lower quality companies.
During the 2017 bull run, Sintex Plastics was a trending stock. Many bought shares of the company between ₹ 90-110. The stock currently trades at ₹ 1 per share – that’s 99% of wealth destroyed!
For investors in Sintex Plastics, a stop loss of even 20% below their buy price – could’ve helped them save a lot of money.