Stop loss order is an exit strategy. An investor places an order with a broker to buy or sell, once the share price reaches the specified level. This arrangement is designed to restrict an investor's loss. This is simple arithmetic. When you set up a stop-loss order for 20% below the price at which you purchased the share, the limit to your loss is 20%. If the share price falls below that limit, the shares will be sold at the prevailing market price.

Profit is the most sought after word in the exchange, and the words ?stop loss? are the most important ones. Unless you give due regard to the latter, profit objective will remain the mirage. The researchers and experts will tell you that no trader has ever succeeded in the market which does not use the stop loss orders as part of business strategy. Establishing a stop loss order and then abandoning them when the share gets close to them is not a good practice, unless it forms part of your well-thought out strategy.

For a dedicated investor with many shares in his portfolio, specifying stop loss orders is an important little activity that has far reaching consequences on the profitability of the portfolio. Moreover, creating a portfolio does not mean that it is the end of the responsibility. You need to constantly review the shares of your portfolio, take the counsel of your broker if you have appointed one to take care of it and add/delete the shares as per the conditions in the market.

The positive aspect of this strategy is, you are free from the job of monitoring your portfolio on a daily basis. More or less, you have an idea of the overall performance of the portfolio. The negative point is that it can get activated by a short-term fluctuation in the share price. It may dislodge the investor from an imminent profitable position. The genuine objective of the stop loss orders is not to take care of the temporary fluctuations in the market. It is the protective shield against the genuine loss trends that happen with the share of the company. The strategy needs to be fool-proof against the volatile vagaries of the market.

You are the best judge to limit your losses but normally such levels are fixed at 5% to 20%. This is again a convention. An active or a day trader may fix the limit at 5% where a long term investor may like to set it at 20%. The legal implication of the order is, once the stop level is reached, it becomes the market order and the price at which the share is sold may be entirely different from the stop price. This happens in a fast-moving market when share prices change in rapid succession.

In fact, the terminology ?stop loss? is a misnomer; rather it is the investor's tool to make money, by locking in profits. The advantage of this system is that it costs nothing to implement. The commission is charged as soon as the limit is reached and the share is sold. Stop-loss order also applies brakes on your emotional decisions. You are prevented from giving the share another chance to move upward and with this process many investors have fallen into the trap of temptation to incur losses. The scale of profit from such orders depends upon what type of investor you are- a growth or value investor or a day trader. Much depends upon your strategy of application of the order.

Stop loss orders as such will not take you to the realm of profits in the exchange. Your intelligent investment decision holds the key. The balancing act of stop loss orders can boost the strength of your decisions. Protection of capital is the most important issue for an investor and stop loss orders lend a helping hand in this direction.