Stop Loss

When investors buys shares they do so with the expectation of making profits. However, an investor will also seek to minimise any losses they might make if they take a wrong decision. If an investor loses 10% on an investment they would need to gain 11% on the remaining position in order just to break even. It gets worse the larger the initial loss is. For example if an investor loses 20% on an investment they would have to make 25% return on the remaining position in order to break-even.

This is where a 'stop loss' comes into play. A stop loss can either be an absolute value below the current share price, or a trailing stop loss can be placed, where the stop loss is defined as a gap between the current price and the sell price, expressed either in absolute terms or as a percentage of the current share price. The investment is sold if the price moves down and falls through the stop value.

By setting a stop loss, an investor has placed a limit on the level of loss he will suffer should the trade go against him, or has protected his profit, if the trade has already moved in his favour. This kind of risk management is a key element to any trading strategy and helps the investor meet the investment aims of letting profits run and cutting losses quickly.

A similar technique can be used on the buying side of a trade where a limit order can be set which controls the price an investor is willing to pay for a share.

What to do if you need more help

If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.

We hope you found this information useful.

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