Stopping in Time: Keys to Understanding Stop Loss

Psychology plays a fundamental role when it comes to investing. We show you how to jump ship before the water covers you.

It is not yet very well known but promises to be something very interesting. Do you know what this start-up is about? Do you trust that the business model they want to carry out is disruptive?

Clearly it's something different, something different, it's sure that the stock will be worth double in no time, because investors have to like this idea as much as you do.

Today may be your day

One in which a lot of adrenaline runs through your body because you finally decided to take the first steps in the stock market. Using all the available money, you decided to buy shares of a new technology company.

It is not necessary to look at the screen all day to see the stock's quote. You should relax and take it easy, but well, you have to understand that by placing all the available money and energy in this company, it is natural that many feelings arise and a lot of energy is generated. We will only recommend checking the evolution of the quote once and that's it. Okay?

Well. A 1.5% down is not much, surely the company is still not well known and that's why they don't buy this pearl. We should wait a few days to see how it goes.

When checking again, you can see that it is going down another 3%. The truth is that the outlook is not good. You don't seem to understand why the market still doesn't see the same potential that you were able to find in this start-up. You should wait because this drop has to stop at some point, surely tomorrow will be the day.

You can't believe it... A news in the newspaper confirms the worst: the company has just suspended one of the business lines that was in the development stage because it is not considered profitable. The stock falls 10% today. Losing 14.5% of my savings and it seems to continue falling. You have to sell now... NOW!

Stop Loss Culture

Many times we think that the price drop will stop at some point because we fully trust the idea we are betting on, but this is not the case.

If you had stopped in time, perhaps the loss would have been less. The market sometimes gives us a lesson at the cost of losing money. In this scenario if we had had in mind the concept of Stop Loss we could have come out victorious from this situation.

Stop Loss is a instruction that you send to the broker with whom you operate to stop losses in case things do not turn out as we expect. When the stock's price touches the "stop", an automatic sell order is executed to close the position. It is a fundamental tool to operate stocks as it allows you to limit the risk you are willing to take.

It is common to set the Stop Loss at a percentage of the value of the investment, for example, if we invest $1000 in a stock and set a Stop Loss at 5%, the order would be executed when the stock's price falls to $950. It is important to note that it is a personal decision and will depend on the investor's risk tolerance.

In conclusion, the Stop Loss is a valuable tool that can help investors limit their losses and make more informed decisions. It is important to have a clear strategy and take into account the level of risk you are willing to assume. Remember that in the stock market, there are no guarantees and it is important to have a plan in place in case things don't go as expected.