What Is A Stop Loss Order?
A traffic stop sign stands in front of a cooling tower at a hard coal powered plant during decommissioning work in Germany. (Photographer: Jasper Juinen/Bloomberg)

What Is A Stop Loss Order?

This is a series of explainers to educate and inform new investors. In association with Dun & Bradstreet India as knowledge partner.

Stop Loss Order: Definition, Meaning & Basics

As the name suggests, a stop loss order is placed to restrict loss.

A stop loss order is typically used by traders. Traders buy and sell shares, often on the same day, to make money from stock movements. When a trader purchases shares of a company with the intention to sell them on the same day at a higher price, he also runs the risk of lower price.

In order to minimise losses in such transactions, traders place a stop loss order.

For example, if a trader has purchased shares of a company at Rs 100 apiece with the intention to sell them at Rs 105 apiece, he can place a stop loss order at Rs 98 apiece to restrict his losses at Rs 2 per share.

Thus, stop loss orders are considered an effective tool of risk management.

Visit the Financial Terms section for more.

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