Risk management: The crucial role of a stop loss when you invest

Fsp Invest, 06 Feb. 2014

Tags: stop loss, what is a stop loss, how does a stop loss work, trailing stop, risk management, risks, losses, investment strategy, strategy, investor, investing,

When you invest and when you trade, you have to make sure you take steps to limit any potential losses. You can’t hold on in the hope that the share in question will recover. So what can you do? One step you can take is to use stop losses on all your investments. Read on to find out what a stop loss is and how you can apply it your investments…

Whenever you buy a share, you need to set a price at which you’ll sell your shares at if the price falls, the research team at Red Hot Penny Shares explains…

And the name for that price is a stop loss.

By using stop losses as part of your investment strategy, it will prevent your emotions interfering with your investment decisions.

Say you set your stop loss at 20% below the buying price. With lower value shares it can be a good idea to give them more room to move than 20%, so you could set your stop loss between 25% and 50%.

Always stick to your stop loss

The main thing with a stop loss is that if a share price falls to your stop loss level, you must sell! Never cut your stop loss.

If the share rises in value, you can drag the stop loss up with it. This is a trailing stop loss.

Unfortunately, sometimes your stop loss system will fail you. And there may be times you will sell your shares and the shares price then rebounds. Nothing is perfect. Occasionally, the share price will plunge way below your stop loss before you can sell. In this case, sell when you can.

When you invest, knowing when to sell is every bit as important as knowing when to buy.

So there you have it, the crucial role of a stop loss when you invest.

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