What is a Stop Loss order?

A stop-loss order is a buy or sell order that restricts losses if the market moves unfavorably relative to an open trade. A sell-stop loss order is typically placed to secure a profit or limit a loss on a buy position, while a buy-stop loss order is used when one has a sell position. This strategy helps traders manage risk by setting a predefined exit point for unfavorable price movements.

Stop-Loss Buy Order: Consider a trader who has a short position, hoping to purchase a stock at INR 90 while it currently trades at INR 95. Anticipating a price decline, the trader has set a stop-loss order at INR 100 to limit potential losses. This means if the stock's price unexpectedly rises, the stop-loss order will trigger to prevent further losses. Specifically, if it's a stop-loss market order, it will execute a market buy as soon as the stock hits INR 100, purchasing at the current market price. However, if it's a stop-loss limit order with a trigger and limit price set (e.g., trigger at INR 100 and limit at INR 100.20), then once INR 100 is reached, a buy limit order will activate. This order aims to close the position at a price up to INR 100.20, ensuring the buy happens at or below this threshold, but not above.

Stop-Loss Sell Order: Consider a trader who owns a stock currently priced at INR 100 and expects it to rise, aiming to sell at INR 110. To safeguard against potential losses if the price falls, the trader has set a stop-loss sell order at INR 95. If this order is a stop loss market order, then as soon as the stock price reaches INR 95, a market sell order will be triggered, selling the stock at the current market price. If, however, the stop loss order includes both a trigger price and a set price, such as a trigger at INR 95 and a set price at INR 94, then the order will activate once the stock hits INR 95. This order will ensure the stock is sold at INR 94 or a better price, but not lower.