Education

Stop Loss Orders – A Good Idea?

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A quick word about stop loss orders. One of the very basic tools that can help you in your investment strategy is a stop-loss orders. These are sales orders conditioned to a particular event, generally a fall in the share price. So, for example, we buy a certain stock, but at the same time we give orders that if the share price falls more than 5%, the stock will automatically be sold.

The usefulness of these orders is clear a priori. They serve to hedge our bets and protect our downside. They help us to limit losses. This is a method recommended by most analysts…but not all.

One rationale is that stop-loss orders can avoid a higher gain. Sometimes the markets take a little breath before continuing the bullish path. And in that respite, a stop-loss order was triggered. Stock movements are not always predictable and they do not always increase steadily. There may be moments of flat or declining growth. This could last a few hours, days, weeks, or even months. However, a stop loss order doesn’t take this into account.

It all comes down to your risk profile. Stop-loss helps those with a safer profile avoid large losses. Taking greater risks, however, could potentially result in larger gains.

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