Stop Losses - They Do Exactly What They Say
By Erik Rosenzweig

A fundament part of investing is risk management, yet most traders on the stock market would agree that stop losses are used too little by investors. They're part of a simple strategy to reduce your losses, and are incredibly easy to implement... here's how:

First I want to explain myself: I want to increase profits for ordinary small time investors, and reduce their risky behaviour on the stock market. These investors have little capital to play with, so odds are when they get hurt, they bleed money. So risk management is my thing, mainly because I don't like losing money.

A stop loss is a pre-set point at which a given stock (let's keep it simple for argument's sake) is sold at a loss. It's an automatic sell designed to reduce the amount of loss an investor is exposed to. It's silly not to use this feature of stock market trading - it gives you certainty in a volatile field. You may be prepared to accept a certain amount of capital loss on a stock, but want to set a limit.

For example, you bought ABC stocks at $15 each, expecting them to jump about a bit in price, but thinking that they may rise in the medium term for a decent profit. You're prepared to see the price drop to $12 and hold the stock, but the thought of any further drop in price makes you weak at the knees. To stop you fainting altogether, you set a stop loss of $12 at which point your broker will sell the stock.

This technique is a common one used by big firms and professional traders, and should be used by more 'mum and dad' investors to protect their investments, which I would argue are far more value relative to the resources behind the investor when compared to an institutional investor. I should mention too that the reverse of a stop loss can be set - a level at which the stock is automatically sold at a level of predetermined profit. That's another topic though, and not really risk minimisation - that's profit minimisation!

Your preferred way of investing on the stock market may be trading shares, CFDs or options - or any of the other many products available to investors these days. No matter what your investment style is, you cannot afford to ignore stop losses. Don't forget to set them, and if something goes wrong with your investment, then you're protected as much as possible, preserving some certainty in your investments.

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