In better understand stop-loss lets take a situation .Suppose you are holding a particular stock, suddenly it started falling heavily (it does happens in realtime market)due to some negative news. This can be very dangerous as it can lead to huge loss. To avoid getting in such situation in market stop-loss order is required. This type of orders prevent your losses from being unlimited to limited .
As an illustration, if you have bought a stock at Rs 100 and you want to limit the loss at 97, you can place an order in the terminal to sell the stock as soon as the stock comes to 97. This kind of order is called as a Stop Loss order . On the positives side , you are placing it to stop a loss which could be more than your risk apetite. A stop loss order is very useful if you don’t have the time to track and execute stop- losses on your trades during the day.
The stop order remains inactive until stop-price is reached. Once this price is reached, the stop order becomes a market order or limit order and your order is placed .
You might be thinking what do i mean when i said stop order becomes a market order or limit order . See similar to market & limit order we read above ,there is stop-loss market order and stop-loss limit order. Stop-loss market or SL-M works in same fashion as normal market order .
SL-M means an market order with a stop loss .The only difference is when your share reaches this price you kept to avoid losses it will get triggered. Stop-Loss limit order means a limit order with a stop-loss .So first you decide the price at which stock will be bought or sold and to avoid losses you kept a stop-loss price .