Ans.
There are two types of stop-loss orders:
1) Sell-stop orders protect long positions by triggering a market sell order if the price falls below a certain level. The underlying assumption behind this strategy is that if the price falls this far, it may continue to fall much further, so the loss is capped by selling at this price.
Example:
Somesh owns 1,000 shares of ABC stock. He purchased the stock at INR30 a share, and it has risen to INR45 on rumors of a potential buyout. He wants to lock in a gain of at least INR10 per share, so he places a sell-stop order at INR41. If the stock drops back below this price, then the order will become a market order and get filled at the current market price, which may be more (or more likely less) than the stop-loss price of INR41. In this case, Somesh might get INR41 for 500 shares and INR40.50 for the rest. But he will get to keep most of his gain.
2) Buy-stop orders are conceptually the same as sell stops except that they are used to protect short positions. A buy-stop order price will be above the current market price and will trigger if the price rises above that level.
