Stock Market Explorer

Posted on 16 Oct 2008

The stop loss system is a fantastic way for an investor to save money on his overall investment. The technique is used to limit the amount of loss one makes through an investment. This is a very important method and is seen as an needed tool for any investor. keep in mind that being a good investor mean learning the process of how to limit your losses in investment. By limiting your loss you're increasing your gain, which means more money. That is always a great thing to hear.

The long term investor would likely not want to place all their investment into one share, that is a recipe for disaster. However the key is to invest into meaningful stakes, which means invest into more than one company, however make absolutely sure you're going to do well in these fields. Now you might think to invest into more then one different companies to maximize the earning potential, this is the wrong idea completely. By investing into more then one companies you're increasing your workload by having to invest your time into monitoring all the different companies. This just leads to confusion and time waste. The better method to use is just simply selecting a few shares that are going to be profitable for you.

You may think that by only investing into a few shares you may lose money if the market collapses on you. The simple answer to this is the stop loss system. Let's take a look at how the stock loss system actually works:

1) Once you buy your share, you must set a price on that share at which you must sell your share at if the price of your share start to fall. This is known as the stop loss price. (Face the fact, your share price is likely to drop sooner or later.)

2) On average, the stop-loss price should be between 10-20% of the price you had paid for the investment share. (Note: If you're investing into a larger company, then the percentage can be lowered to just 5-10%. However in the case of investing into a small company, the percentage should be around the 30% mark)

3) When you notice your share price is rising, you must raise your stop-loss price. Example: you've just bought into 'BMW' at $500. Your stop loss price is $450 (10% margin for $500). If 'BMW' price raises to $550, the stop loss price must come up to $500.

4) Basically, in this scenario your stop loss marking is of 10%. So this means you can't lose more than 10% of your initial investment.

This is the stop loss system. keep in mind that being able to give up on a share is difficult, many investors become emotionally attached. You must comprehend that this industry isn't about gut feelings. it's plainly and simply about making decisions based on facts and figures. Your judgment is based upon what you can make of the figures, not from a "feeling".

This isn't the perfect system, no system can be perfect otherwise everyone would be using it, and everyone will be making too much money. Not every share is going to drop by 10-20%, you may find on occasion you've sold a share too soon and watch the price of it rise in your face. However this is the price paid for having caution. Remember risk equals more reward, however for the safer investment this is a great technique that should be used. Good luck in all your ventures.

Ajay Sahota

Professional Investment Trainer

http://www.howtoinveststock.net - Free resources and lessons on How to Invest Stock.