While buying and selling in the stock market, there are five common types of orders namely:
a limit order, market order, stop loss order, stop loss market order, and stop loss limit order.
However, for the scope of this discussion, we focus our attention on the three types of above orders in terms of trigger price or stop loss price. Be with us till the end if you like to understand more about Stop Loss and Trigger Price in the share market.
Trading and investing in the share market bring significant potential for wealth creation, However, there is also an inherent risk. This is why it is crucial for traders to use stop-loss orders wisely.
Typically, to protect your investment, the proper use of a stop-loss order is very important.
These stop-loss trading tools help in simplifying the decision-making process and keep them practical,
especially in times of adverse market conditions.
A Stop-loss is a type of order where you specify a trigger price at which either a limit order or market order is placed. These triggers are placed on the exchange and not within the broker systems.
A trigger price or stop-loss price is generally a sell order, which is mainly used with stop-loss.
A stop loss is simply a cap for the losses that can be sustained, a limit provided by the trader to the broker.
In simple words to says, For a ‘Buy’ stop loss order, the trigger price will be lower than the buying price. However, for a ‘Sell’ stop loss order, the trigger price will be higher than the buying price.
Let us now explore the various types of stop-loss orders.
Stop-loss Orders Type with Example
These are the 3 types of stop-loss orders with the definition
Stop Loss OrderThis orders can protect you from large losses and save your capital from erosion. With a stop loss order in place, you are able to minimize your loss on a particular trade. This order is activated only when the price of the stock declines to the specified trigger price. So, let’s have a look at the examples given below to understand
If you intend to purchase a stock with a value of Rs. 100, you can set the “stop-loss trigger price” as Rs. 5. This means that you are prepared to bear a max loss of Rs. 5 on your order. As and when the price of the scrip reaches Rs. 105, your “stop-loss buy” order will be placed immediately.
In case you wish to “sell” a scrip that you purchased at Rs. 100, you can set a “stop-loss trigger” of Rs. 3. Therefore, you are willing to bear a maximum loss of Rs. 3 upon sale. Hence, when the scrip price reaches Rs. 97, your “stop-loss sell” order will be placed instantly.
Stop Loss Market OrderA stop loss market order is a mix of a stop loss order and a market order. Here, the order is set at a special trigger price. Once the stock price reaches or dips below the trigger price, the order is executed as a market order.
Let’s consider an example. You purchase a share for Rs. 100 and expect it to increase. You had set the stop-loss trigger to Rs. 3. Unfortunately, the share goes down to the stop-loss price of Rs. 97. At this time, your order will be executed at the current market rate, which will limit your total losses to Rs. 3 (100-97).
Stop Loss Limit OrderA stop loss limit order is a combination of a limit order and a stop order. In this case, a stop loss limit is set at a specific price. When the market price reaches that particular price level, the transaction is executed. The stop loss limit order carries out the trade at the specified price—or at a better price if that is possible.
So, let’s have a look at the examples given below to understand: You have purchased shares at Rs. 1200 per share. You now set a stop loss limit order at a trigger price of Rs. 1,170. Here, your stop loss limit order will try to sell your shares at Rs. 1,170 (or at a higher price if that is available). Now, suppose a new event results in a decrease in the share price and the market value falls to Rs 1,160. Since you placed a stop loss limit order, the order won’t be executed at Rs. 1,170. it will wait to try to sell the shares to Rs. 1,170. If the stock price bounces back to your trigger price Rs 1,170, your order will get executed. This way you can avoid incurring an additional loss of Rs. 15.
Note: You can place the stop loss order as many times as you wish and modify it if necessary. However, if the stop loss is triggered and partially executed, you will be unable to modify it.
Let’s take an example of the trigger price in zerodha.
Trigger Price in Zerodha
Once the share price hits Rs. 206/-, your order will become active, This means that your order will be triggered, and a limit order of Rs. 208/- will be sent to the stock exchange.
So the share will be bought either at Rs 208/- or lower than that provided sellers are available at that price point.
To activate it, a trigger price is required. Above the stop-loss price, a trigger price acts as a price threshold, and only after crossing this price does the stop-loss order change from a passive order to an active order.
Nearly all investing approaches can benefit from using this technique, whether to limit excessive losses or to lock in profits. Therefore, consider a stop-loss as a type of insurance against bad times.