Matt Comyn, CommSec

A Stop Loss is an instruction for a particular share in your portfolio to be placed for sale on the market when it trades at a pre-determined price. You decide which share you wish to sell, and set an acceptable exit price below the share's current trading price.

Imagine you own shares trading at $10.00 and you want to ensure that if the stock falls, you sell out at no less than $9.43. Through CommSec Conditional Trading, you would set a Stop Loss Trigger at $9.50 along with a Stop Loss Limit Order at $9.43. Should the shares trade at the trigger point of $9.50 or lower, your limit order will be submitted* to sell the shares at no less than $9.43. If there is insufficient demand above or at $9.43 your triggered order will remain in the market subject to CommSec's General Conditions of Trade and Trading Rules (20 Trading Days for standard accounts or 5 Trading Days for Margin Lending Accounts).

*Orders are placed subject to CommSec's vetting procedures

There are two ways to use Stop Loss

1. Lock in any gains you have already received

By way of example, a few months after you buy 1,000 shares of XYZ Ltd at $10 per share the share price increases to $11.60 per share. You have an unrealised gain of $1.60 per share. You do not want to lose what you have gained or the chance for further gains, but you want to realise your profit if the price starts going down.

To protect your investment you submit a Stop Loss Trigger at $11.50. You ask CommSec to submit a Stop Loss Limit Order* to sell the stock at not less than $11.40, if the stock trades at or below your Stop Loss Trigger. You can also arrange to be alerted via SMS or email when the share price reaches your Stop Loss Trigger. If the share price descends to your trigger point at $11.50, your sell order will be placed into the market*. If there are sufficient buyers in the market your stock will be sold at no less than $11.40 and your gain may be realised.

The following diagram is for illustrative purposes only:

2. Limit any losses you are willing to take.

For example, let's say you buy 1,000 shares of XYZ Ltd at $10 per share. You want to limit the losses of your investment, so you set your Stop Loss Trigger at $9.50, with a Stop Loss Limit Order to sell your shares at no less than $9.43 if the stock trades at or below your Stop Loss Trigger. You can also arrange to be alerted via SMS or email when the share price trades at your Stop Loss Trigger price. Should the shares trade at $9.50 or lower, your limit order will be placed* to sell the shares at no less than $9.43.

The following example is for illustrative purposes:

By Matt Comyn, General Manager, CommSec

Disclaimers: The views expressed in this article are those of Matt Comyn, a representative of Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814 and is not intended as general advice.