Article

Stop-Loss Trigger
June 07 , 2012

A common risk mitigation technique used in share trading is to have limits to how much loss one is prepared to take in a given share. In this case, the share is sold the moment it drops to this threshold. Today, stock exchanges allow an automatic way to do this – using the stop-loss or stop-loss trigger.

For instance, you may buy Infosys shares at Rs.3,000 expecting it to rise from that level. Yet, you may decide that you are not prepared to take more than a 10% loss on this share. In such a case, you set a stop-loss trigger at Rs.2,700. If the share price falls to this level, your shares are immediately sold, so that you do not have the risk of incurring any further loss.

There are both pros and cons of using such triggers. The advantage of the system is to limit your losses. The biggest con is that it does not favor patience – a long term investor would tell you to not panic if prices fall, but to simply wait it out. A trigger defeats this virtue by selling the shares at a loss.

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