Why keeping a stop loss is so important

why keeping a stop loss is so important

If a stock falls from Rs 100 to Rs 5 then it sees a fall of 95 percent, but it will need 1,900 percent jump to travel the reverse journey from Rs 5 to Rs 100

While most investors in stock market are fixated on the profits made, experienced players know one of the key things to keep in mind is stop loss.

Stop loss is the level of a stock price where investors/traders should sell an equity or commodity to limit their loss.

Many players stay invested in a scrip even when it is falling with a view that they will sell it when the stock rises to the level at which they bought it, to cover their losses. But they fail to understand that when a stock falls 50 percent, it has to gain 100 percent for it come to that very level.

While calculating the percentage of damage in a stock, one should note that larger the loss, higher the percentage gain needed for losses to recover.

  • A loss of 50 percent requires a 100 percent gain for the stock to recover to the same level.

  • A loss of 75 percent requires a 300 percent for the stock to recover to the same level.

  • A loss of 90 percent requires a 900 percent for the stock to recover to the same level.

  • A loss of 95 percent requires a 1,900 percent for the stock to recover to the same level.

  • A loss of 99 percent requires a 9,900 percent for the stock to recover to the same level.

For e.g. If a stock falls from Rs 100 to Rs 5 then it sees a fall of 95 percent, but it will need 1,900 percent jump to travel the reverse journey from Rs 5 to Rs 100.

Hence, keeping a stop loss and adhering to it when the stock market is falling is very important, especially if a stock is fundamentally not strong.

In the below-mentioned infographic, we have presented the stocks that have seen a fall of 99 percent in the last five years (October 21, 2015 to October 21, 2020). We considered only stocks whose market-cap was over Rs 1,000 crore five years back, that is on October 21, 2015.

Note: Infographic is only for representation purposes, this is not a Buy or Sell recommendtion.