Can We Set a Stop Loss on Shares We Already Own? The Complete Guide for Investors

Investing in the stock market carries certain risks, and one of the strategies that can help mitigate these risks is setting a stop loss. This article will explore how to set a stop loss on shares you already own, the different types of stop-loss orders, and the practical steps involved. We'll also provide a real-world example to illustrate the importance of using stop losses.

Understanding Stop-Loss Orders

A stop-loss order is a critical tool for investors who want to protect themselves from significant losses. It allows you to sell your shares automatically if the stock price reaches a specified price point, thus limiting your potential losses.

Placing a Stop-Loss Order on Existing Shares

Yes, you can set a stop-loss order on shares you already own. This is not limited to the time of placing the buy order; you can set a stop loss anytime after your shares are bought. Here’s how it works:

Stop-Loss Order

A stop-loss order is set at a specific price point below the current market price. If the stock price reaches that level, the order will automatically trigger a market sell order. This helps you sell your shares at a predetermined price, limiting your potential losses.

Stop-Limit Order

Alternatively, you can set a stop-limit order, which specifies both a stop price and a limit price. When the stop price is reached, the order becomes a limit order to sell at the limit price or better. This provides more flexibility, as you can control the price at which you sell your shares.

Practical Steps to Set a Stop Loss

To set a stop loss on shares you own, you generally do this through your brokerage account. Here are the steps:

Login to your brokerage account. Ensure you have access to your account and navigate to the feature that allows you to manage orders. Enter the details for your stop loss order. Specify the stock symbol, the stop price, and the quantity of shares. Choose the type of order (stop, stop-limit, etc.). Decide whether you want a simple stop loss or a more complex stop-limit order. Place the order. Once you have entered all the necessary details, submit the order. Verify the order. Make sure to review the details before the order is executed. Monitor your order status. Keep an eye on your account to ensure the order is placed and executed as intended.

Types of Stop Loss Orders and Their Differences

There are two main types of stop loss orders:

Stop-Loss Order: This order will convert into a market sell order once the stop price is reached. It is less specific about the price at which you sell the shares, which can result in a lower price than you might prefer. Stop-Limit Order: This order converts to a limit order once the stop price is reached. It ensures that you sell your shares at or above a specified price, making it more controlled and less risky.

Setting Stop Loss Orders

Once the shares are bought, the trade is over. You can still manage your position by using stop loss orders. However, it is important to note that stop loss limit orders are typically valid only for intraday. This means that your stop loss order will be valid for the day and will need to be re-entered the next day.

You can also set a stop loss for the sell order if needed. Stop losses are a concept that helps traders minimize or pre-plan losses when the trade goes against them.

Real-Life Example: The Importance of Using Stop Losses

Let's consider a real-world example: after careful research, you bought Lupin at ?1625. The stock subsequently went up to ?1675, but instead of booking profits, you kept hoping it would cross ?1700. Unfortunately, the price dipped below ?1600. You immediately sold it at an average price of ?1600, and now it is sinking below ?1000, expected to slide to ?600 in the next three months.

If you had set a stop loss at, for instance, ?1600, you would have sold the shares at that price the moment the stock reached ?1600. This would have protected you from further losses of ?625 per share. Having a stop loss in place can significantly reduce the impact of market downturns on your portfolio.

Conclusion

Setting a stop loss on shares you already own is a crucial strategy for risk management in the stock market. Whether you opt for a simple stop loss or a more controlled stop-limit order, these tools can help you protect your investments and minimize potential losses.

If you have any questions or would like to know more about using stop losses, don't hesitate to reach out to your broker for guidance. Remember, maintaining a portfolio with stop losses can provide you with peace of mind and better financial management.