Knowing Your Safety Net: 4 Things to Know About Stop Loss in Stock Trading

When it comes to trading, timing is everything. It’s crucial to both buy and sell at the right times to maximize potential profits. However, that means monitoring every stock very carefully, which may not be possible for those who do not buy and sell stocks for a living. For most people, a stop-loss order is going to be vital, as it can help them minimize potential losses if the stock’s value drops.Stop Loss in Stock Trading

Understand How a Stop-Loss Order Works

When someone purchases stock through a trading platform like TradeZero, they can choose to implement a stop-loss order. This type of order is intended to help prevent significant losses when buying and selling stocks. The investor will need to choose the percentage at which this goes into effect when they create the order. If the stock’s value drops to the point where it triggers the stop-loss order, the order will turn into a market order and the stocks will automatically sell.

Stop-Losses Mean Less Monitoring for Investors

A stop-loss order is intended to help ensure the stock does not drop too low before the investor can sell it by setting it up to automatically sell at a certain point. This means investors can spend less time monitoring stocks, as they won’t have to worry about missing their chance to sell before the stock plummets. This could be perfect for those who do not trade stocks for a living, as it allows them to ensure they can sell quickly if the stock value falls, even if they’re at work or otherwise busy when the decline occurs.

Choosing the Right Limit is Key

Stock-loss limits can be set for what the investor prefers. Those who are new to investing or more conservative and want to reduce their risk as much as possible might set the stop-loss for around 5% of the stock’s value when it’s purchased. Those who are more focuses on long-term gains through investments may, instead, choose a stop-loss set at 15% or more of the stock’s value. While this does mean they could lose a bit more money if the stock’s value drops, it does allow them to handle fluctuations in the stock’s value without issue.

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Stop-Loss Orders Could be Triggered Unnecessarily

One of the downsides to stop-loss orders is that they can be triggered unnecessarily. If the stop-loss is set for 5%, it will be triggered as soon as the stock’s value drops by 5%. However, 5% is a normal fluctuation for a lot of stocks, and the value will quickly recover after this happens. If there is a stop-loss order in effect, the stock will be sold before the value recovers, which means the investor may miss out on potential profits.

Stop-loss orders can be hugely beneficial for investors who do not have the time or ability to watch the stocks carefully as it enables them to make sure stock is sold quickly if it drops in value. It can help them avoid losing a lot of money if the stock’s value decreases rapidly. However, a stop-loss order should be created carefully to avoid potential downsides. If you’re getting started in stocks, make sure you understand how to choose the right value before entering a stop-loss order, as this can help you minimize potential unnecessary triggers yet still allow you to sell quickly if it looks like the stock might be losing value.