What is Stop Loss?

A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit) or a limit order (fixed or pre-determined price).

With a stop order, the trader does not have to actively monitor how a stock is performing. However because the order is triggered automatically when the stop price is reached, the stop price could be activated by a short-term fluctuation in a security's price. Once the stop price is reached, the stop order becomes a market order or a limit order.

In a fast-moving volatile market, the price at which the trade is executed may be much different from the stop price in the case of a market order. Alternatively in the case of a limit order the trade may or may not get executed at all. This happens when there are no buyers or sellers available at the limit price.

Types of Stop Loss order

1) Stop Loss Limit Order
A stop loss limit order is an order to buy a security at no more (or sell at no less) than a specified limit price. This gives the trader some control over the price at which the trade is executed, but may prevent the order from being executed.

A stop loss buy limit order can only be executed by the exchange at the limit price or lower. For example, if an trader is short and wants to protect his short position but doesn't want to pay more than Rs.100 for the stock, the investor can place a stop loss buy limit order to buy the stock at any price up to Rs.100. By entering a limit order rather than a market order, the investor will not be caught buying the stock at Rs.110 if the price rises sharply.

Alternatively a stop loss sell limit order can only be executed at the limit price or higher.

Advantages and disadvantages of the stop loss limit order
The main advantage of a stop loss limit order is that the trader has total control over the price at which the order is executed. The main disadvantage of the stop loss limit order is that in a fast moving volatile market your stop loss order may not get executed if there are no buyers/sellers at the limit price.

2) Stop Loss Market Order
A stop loss market order is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit). In other words a stop loss market order is a order to buy or sell a security at the current market price prevailing at the time the stop order is triggered. This type of stop loss order gives the trader no control over the price at which the trade will be executed.

A sell stop market order is a order to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price. For example, if an trader holds a stock currently valued at Rs.100 and is worried that the value may drop, he/she can place a sell stop order at Rs.90. If the share price drops to Rs.90, the exchange will sell the order at the next available price. This can limit the traders losses (if the stop price is at or below the purchase price) or lock in some of the profits.

A buy stop market order is typically used to limit a loss (or to protect an existing profit) on a short sale. A buy stop price is always above the current market price. For example, if an trader sells a stock short hoping the stock price goes down in order to book profits at a lower price, the trader may use a buy stop order to protect himself against losses if the price goes too high.

Advantages and disadvantages of the stop loss market order
The main advantage of a stop loss market order is that the stop loss order will always get executed. The main disadvantage of the stop loss market is that the trader has no control over the price at which the transaction is executed.

Conclusion
Stop loss orders are great insurance policies that cost you nothing and can save you a fortune. Unless you plan to hold a stock forever, you should consider using them to protect yourself.

SHORT SELL

Short Selling
Profit from Short selling the Indian Futures Markets

What differentiates futures traders for most ordinary investors is the fact that most of them are as likely to sell a market as they are to buy it. Unlike many equities strategies that focus only on advancing markets, in futures you can just as easily make money if prices are going up or down.

Have you ever been absolutely sure that a stock was going to decline and wanted to profit from its regrettable demise? Wouldn't it be nice to see your portfolio increase in value during a bear market? Both scenarios are possible. Many investors make money on a decline in an individual stock or during a bear market, thanks to an advanced investing technique called “short selling.”

Short selling is neither terribly complex nor entirely simple. In other words, it's a concept that many investors have trouble understanding. In general, people think of investing as buying an asset, holding it while it appreciates in value, and then eventually selling to make a profit. Shorting is the opposite: an investor makes money only when a shorted security falls in value.

Most investors know the adage, "buy low, sell high." But, did you know that in the futures markets, the adage can also be turned around so you "sell high, buy low?" When you sell before a purchase, you are "selling short."

A short sale is made when prices are expected to drop, at which point you could offset the position with a buy, and claim a profit.

Why Short Sell?

There are two main motivations to short sell:

1. To trade
The most obvious reason to short is to profit from an overpriced or downward trending bear market.

2. To hedge
Very few investors short as an active investing strategy. The majority of investors use shorts to hedge. This means they are protecting other long positions with offsetting short positions.

Advantages of Short Selling Stock and Index Futures?

Make money in downtrends and bear markets when prices fall.
It may seem obvious, but what goes up must come down. If you think prices are due for a fall you can sell short to position yourself to gain from that drop.

Take a position with margin.
Futures positions tie up less money than stocks. Whether you're long or short, a position in single-stock futures requires margin equal to a certain % value of the contract's value.

Sell without owning.
In the futures markets, unlike the cash markets, you can sell stocks without actually owning or having them in your demat account. Shorting stock or index in futures have no such restrictions. Going short is just as easy as going long.

Sell at a better price.
Single-stock futures can sometimes be sold at a price higher than the actual stock itself. This happens because most single-stock futures trade at a premium to the stock price, called "basis."

How To Sell Short With Stock and Index Futures

For many investors the question is not whether to go short, but rather, how best to go about it. This is the easy part. When the time comes to position yourself for a downward move, simply place your order to sell. You can go to the market, work a limit order or enter a new position with a sell stop — just as you could with any buy order.

With futures, you're not selling the actual stock or index. Instead, you're entering into an agreement to deliver or close out your position before the contracts expiry date. Most investors simply buy back their short positions before the contracts expire.

And Finally...

Some people mistakenly believe that making profits on a short sale is unpatriotic, unethical or mean-spirited. But remember that for every buyer there is a seller taking the other side of the trade. That's what makes a market — two parties with different opinions about the future direction of the item being sold.

Unless a short sale involves fraud or manipulation, it is a routine valued aspect of liquid markets. After all, short-sellers will eventually be buyers — either to cover their short or to make delivery.

Why limit your opportunities with preconceived notions of what is or is not appropriate? If you think the market is due to rally, then buy. If you're bearish, then sell. And if you decide to take action on your bearish opinion, the short sale can get the job done nicely.