December 2, 2010 5:00 pm
I’m interested in knowing the different types of stop loss options that can be executed while buying or selling a stock? In what situations these options could benefit an investor?
Dear Mr. Purna chander,
It is a good thing that you want to learn about the stock market. I will suggest you a few things:
1. Read a lot of books so that you get a good view about what and how (very less why) of the stock markets.
2. Do not be in the markets for a short term. There are no “sure-shot” short term strategies to Grow money.
3. Do a lot of research about companies before individually investing in them. It looks very tempting to think that such and such company’s stock has been a multi-bagger but there are equally bad stocks too. For any stock you buy/sell, you should write down the reasons for doing that. Buy a company which is “Good Enough, & Cheap Enough”.
4. Always have a well-diversified portfolio. Even if one company goes bust, you should not suffer a lot (e.g. Satyam).
5. Equity mutual funds are a great and probably the best way for a new investor. Do not underestimate the returns of mutual funds. They have been fantastic and should remain so for a long time! Probably.
6. Selecting individual stocks means you are confident about the particular stocks and are betting that they will give you much more returns than simply investing in the whole market (or index, etc). Examine the reasons for that and Be Prepared that the amount you want to gain can also cause that much loses. If you are prepared for that, go ahead.
7. Regarding your specific query of Stop-loss / Limit-loss. As I said, it is a loss making strategy and it should not be used AT ALL. But that is my point of view. I will give you an example. Suppose there is a stock which you bought at 100 and I had bought it 3 years ago at 30. You have kept an arbitrary Stop-Loss of 20%. Because of volatility in the market, the stock comes down to 75. Will you sell it? Should I sell it? The stop-loss does not give you a clear-cut answer. “You should sell a stock if the underlying reason why you bought it have been superseded by new information which leads to your analysis pointing it as Sell, whether that new information comes at a mild loss or severe loss or any gain.”
8. There is reverse of Stop-Loss too. Profit booking at particular amounts of gains. Many people have this tactic of booking partial profits at say 30% or 50% or whatever arbitrary level. The above logic stands in this case too.
In short, the only option that I know is Buy a good company stock after researching it thoroughly with solid reasons. Then you will not be required to execute stop-losses/limit-losses.
Hope I am able to help you.
Great list 🙂
As a principle, stop-loss is a money-losing tactic and investors should not use it anytime. As per Buffett, “There’s no reason we should become fearful if a stock goes down. If a stock goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.”
The more appropriate term is “limit-loss”.
For traders and momentum investors, it is probably ok!.
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