Are you looking for ways of minimizing your losses when you invest? Then the tool you should be looking for is stop loss.
What is stop loss? In this article, you’ll find the answer and learn how to apply it.
What Is Stop Loss?
Risk is inevitable in financial markets. Therefore, you can win or lose your money anytime. With the use of stop loss, you can avoid losing all of your investment by setting a stop loss on a limit of the losses you incur.
For example, you bought an asset with a market price of $30, and then you set a stop loss of $27. So, when the market price reaches $27 below, you’ll sell your financial instrument with the current market price.
Perks of Stop Loss
Here are some of the advantages of using stop loss:
- You can use stop loss as insurance without payment. You can stop the losses of your investment without spending an expensive amount of money. The fee is just minimal if you reach the limit you set for your stop loss.
- You’re able to free yourself from overthinking the decisions of selling your assets. You’ll be able to decide when to sell your assets instead of hoping that the price would still go up and get more losses.
- You don’t have to check on your assets from time to time. Even if you’re busy, you know that you won’t lose all the money you invested.
- You’ll know which assets are worth investing your money in once you know which market to avoid, or just think twice before putting your money. You’ll become knowledgeable of the different market trends.
Take Profit With Stop Loss
Besides avoiding losses, you can use stop loss orders to get profit. It would be best if you were to take profit as the market price changes. A great way of gaining profit is through a trailing stop. When you set a trailing stop, the stop loss is at a percentage lower than the present market price.
Let’s say that you set a trailing stop 5% below the present market price, and then the price goes up to $20 in a month. Your trailing stop would be $19 ($20 x 95%). Then, $19 would be the lowest possible price you can receive when you sell your shares in the current market situation.
Challenges With Stop Loss
When you use stop loss, there will always be challenges along the way. Here are some struggles you might face:
- Setting a minimal percentage of a stop loss can be a disadvantage. You can sell your assets at a good time for prices going up. For example, you bought a stock for $20 per share, and then you set a stop loss of $19.50. So, when the market price reaches $19.45, you need to sell your share. Then, the next day the price went up to $21. You will miss a big opportunity for your shares to grow.
- When you sell, the selling price can be quite different from the price you bought them. So, in a fast-moving market, you might sell your assets at a much lower price, and you’ll lose more than you expected.
- You’ll get discouraged from investing in opportunities for your money to grow. You’ll have a fear when you experience minimal losses when you set the stop loss. Thus, you won’t invest in other assets and miss out on gaining lots of profits.
Tips in Using Stop Loss
To minimize your risks even further, follow these recommendations:
- Set a reasonable stop loss price. Don’t set a too low stop loss price – you might end up regretting selling your assets at a very early time instead of still gaining profits.
- Know about the long-term investor’s strategies in financial markets. Most investors set the stop loss 15% of the market value they got in the first place. As a newbie, you might be thinking of setting it to 5%, but you might end up with regrets when the market prices go up.
- Understand how financial markets work, and you can’t just invest your money without knowing how the market works. You need to learn about the trends and prices.
- Don’t be afraid to take calculated risks. Investing always has losses. You need to be mentally prepared when the market trends don’t go according to your plans.
- Invest your money in different assets. Then, use stop loss in each investment. You’ll know which companies, programs, institutions, and more can give you the best returns in investment. You’ll be able to compare different market trends and determine where you’d invest and not invest.
Take Advantage of Stop Loss
Stop Loss is a simple and good way of preventing too many losses upon investing in financial markets. You just need to be smart in using it, and you’ll enjoy all the benefits of investing. It’s best to know how to protect your money even if you’re not always present in checking your investments from time to time.
