What is Stop Loss?

An investor may use stop-loss to limit his losses. This is an order that the investor gives to his broker to sell security when it reaches a predetermined price. Let's take Ram, for example, who buys 50 shares of ABC Mobiles at a rate of 1 000 rupees each share. The share price drops to 960 rupees each share in a short time. To prevent further losses, Ram's broker, will sell the shares if the price falls further to nine hundred fifty rupees.

Ram, on the other hand, would like to keep his shares even if the share  price rises to one thousand forty-five hundred rupees per shares. He enters a stop loss order to sell his shares if the price drops to one thousand three hundred rupees. Ashish preserves his investments by placing the stop-loss orders. This allows him to keep his gains and prevents potential losses.