The definition of stop loss or stop loss is the sell order in bag to be executed when a condition is met. This type of order is generally used to establish a maximum loss limit and when there is a fall in the price to the predetermined value the actions are sold automatically.
The stop loss is an essential tool for trading stocks, as it allows you to control the risk assumed when making a trade, and therefore, limit the losses that an investor is willing to bear.
Therefore, the concept of stop loss sets a limit of money that we can bear when buying securities on the stock market. It is advisable to set the stop loss after purchasing the shares. It is very useful for small investors who do not have time to keep up with the stock prices.
It is also used in finance with cryptocurrencies, so as not to lose money with the strong drops that occur on many occasions. For example, if you have Bitcoins, you can set a price from which they are sold automatically, with the aim of losing the minimum money at home from a sharp fall.
It can also be used to avoid losing possible increases and to avoid the sale of shares prematurely, which would lead to a loss of profits.
How do you know where to put a stop loss?
The investor sets a price that would be equal to the maximum that he is willing to lose. In the event that the shares reached that figure, they would be sold automatically.
In the event that an investor acquires shares in a company at 10 euros per share and the maximum limit that he is willing to lose is 20%, in that case he would establish a conditional order at a price of 8 euros per share. When the shares reached 8 euros they would be sold automatically and when this figure does not reach the investor will operate normally.
This tool allows the investor not to have to be aware of the prices at all times and limits the risk of investing in the stock market. Setting a stop loss is offered by most brokers for free.