For those who deal in the stock market, using a ‘Stop loss’ is a very common method to limit their losses. However, most people do not really understand how it woks in real life and do not realize that it could be very dangerous.
For those who do not know, the ‘Stop Loss’ is set by the investor at a certain level. Say, I’ve bought a stock for Rs.100 and I want to limit my loss to Rs.10, then I will set my ‘stop loss’ to Rs.90 – the idea being that if the stock price falls to Rs.90, it will get sold.
However, that is not exactly what happens. At the stop loss limit, the stock is put in line to be sold (as opposed to actually being sold). The rate at which it is actually sold could be much lower.
I was reading about someone in the US who had set the stop loss of a stock that was trading at 108 at 90. In the recent crash, the stock came crashing down and even though this guy’s stock was queued in line for sale when it touched 90, it was ultimately sold at 77.
To make matters worse, the stock recovered in the latter part of the day to close at 102!
Give it a thought.
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PS: Money cannot buy only one thing – poverty. So you need to seek the assistance of the stock market – Robert Orsen.