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Community User Posted on 12:08pm 22-Jul-2021

What is STOP LOSS concept?

  • ICICIdirect Executive Thank you for the query. We would like to inform you that a Stop loss order allows the client to place an order which gets activated only when the market price of the relevant security reaches or crosses a threshold price specified by the investor in the form of Stop Loss Trigger Price . When a stop loss trigger price (SLTP) is specified in a limit order, the order becomes one which is conditional on the market price of the stock crossing the specified SLTP. The order remains passive (i.e. not eligible for execution) till the condition is satisfied. Once the last traded price of the stock reaches or surpasses the SLTP, the order becomes activated (i.e. eligible for execution by being taken up in the matching process of the exchange) and then on behaves like a normal limit order. It is used as a tool to limit the maximum loss on a position.

    Examples :

    Stop Loss Buy Order
    A short sells Reliance shares at 325 in expectation that the price will fall. However, in the event the price rises above his buy price A would like to limit his losses. A may place a limit buy order specifying a Stop loss trigger price of 345 and a limit price of 350. The stop loss trigger price (SLTP) has to be between the last traded price and the buy limit price. Once the market price of Reliance breaches the SLTP i.e. 345, the order gets converted to a limit buy order at 350.

    Stop Loss Sell Order
    A buys Reliance at 325 in expectation that the price will rise. However, in the event the price falls, A would like to limit his his losses. A may place a limit sell order specifying a Stop loss trigger price of 305 and a limit price of 300. The stop loss trigger price has to be between the limit price and the last traded price at the time of placing the stop loss order. Once the last traded price touches or crosses 305, the order gets converted into a limit sell order at 300.

    Important
    Please note that in a buy order the SLTP cannot be less than the last traded price. This is treated as a normal order because the condition that the last traded price should exceed the stop loss trigger price for a buy order is already satisfied. Similary, in case of a stop loss sell order the SLTP should not be greater than the last traded price for the same reason.

    12:46pm 22-Jul-2021