Stop Loss Trigger ??

I started trading today on the BSE. Here is something I need to know.

Stop Loss Trigger Tool

The Stop Loss Trigger Tool is actually a bit of a misnomer.

This tool is most useful in protecting your profits on an open position. The Stop Loss order is a conditional order to either Buy or Sell.

The condition being that the order is activated only when that stock trades at a specific price defined by you. As is the case in any order, you will have to specify the quantity and the limit price (or market price) at which you want the order to be executed.

And in addition you will have to specify a Trigger Price.

Only if the Exchange records a trade at the price defined as Trigger price by you, will your order will be activated.

In case you choose to use a Limit price (as opposed to market price) for your Stop Loss order, you must remember the following guideline :

- For a Buy order, the limit price must be greater than or equal to the trigger price.

- For a Sell order, the limit price must be less than or equal to the trigger price.

If, for a stop loss order to buy, the trigger price is 93.00, the limit price is 95.00 and the market (last trade) price is 90.00, then this order will be released into the system once when the market price reaches or exceeds 93.00. This order will be added to the order queue at the exchange with the time of triggering as the time stamp, as a limit order to buy at Rs95.00. Till such time that the order is triggered it will stay in a separate queue at the exchange which is not visible to other market participants.

Remember even the stop loss tool is valid only for a trading day. If your stop loss order is not triggered during the trading day, it shall lapse automatically at the end of the trading session.

When do you use a Stop loss order?

The Stop Loss order is a great way for a trader to manage his exposure in the market. Lets us say that a trader wants to buy ABC company at Rs100 because he expects the price to rise to Rs120 in a short time. But he does not want to take an unnecessary risk and hence he wants to exit the trade (sell his shares) in ABC company if the price drops below Rs95.

So he first buys 100 shares at Rs100. Then to protect himself against an unexpected movement and limit his losses he would punch in a stop loss sell order for 100 shares of ABC Co. with a trigger price of Rs95. He could choose to sell with a limit price of his choice or at market price.

So if the shares of ABC drop to trade at Rs95 his order is immediately triggered and pushed into the queue for execution.

This system finds similar application in the case of short positions.

Disclosed Quantity :
The system provides a facility for entering orders with quantity conditions: DQ order allows the member to disclose only a part of the order quantity to the market. DQ (Disclosed Quantity) should not be less that 10% of the Order Quantity and at the same time should not be greater than or equal to the Order Quantity.

Systematic Investment Plans aka SIP

Systematic Investment Plans (SIPs) are much misunderstood. For one, investors often mistake SIPs as an investment avenue rather than a mode of investing in mutual funds. Then there are investors who invest in SIPs expecting quick results without fully appreciating the need to invest via SIPs for the long-term.

In an earlier article, we discussed how SIPs are perceived incorrectly by many investors as standalone investments. This explains why one of the most common queries we receive on the website is – which is the best SIP? Unfortunately, these investors have not been educated by their investment advisors about SIPs i.e. SIPs are only a mode of investing and not an independent investment avenue.

Minimum tenure of an SIP
Another misconception investors have about SIPs is with regards to the minimum tenure. Most fund houses have a minimum SIP tenure of 6 months. This leads investors to believe that 6 months is the ideal time frame for investing via SIPs (just like a lot of investors invest Rs 5,000 in mutual funds simply because that is the minimum investment amount for several mutual fund schemes).

In our view, investors should ideally invest via SIPs over at least 2-3 years. This way they can exploit the most critical benefit of an SIP – rupee cost averaging. Let’s understand how this is possible.

For an SIP to deliver the goods, it must witness a falling market. This way the investor can average out his cost of purchase. If the investor does not witness a downturn, i.e. he is only exposed to a market rally, the average purchase cost of his SIP will rise over a period of time.

SIPs in a rising market

Month of investment	NAV (Rs)	No. of Units
January	11.00	45.45
February	12.00	41.67
March	12.50	40.00
April	12.90	38.76
May	13.25	37.74
June	13.40	37.31
Avg. purchase cost of 6 SIPs	Rs 12.45

In the above table the average purchase cost of the SIP is Rs 12.45. Clearly, the SIP has not worked in the investor’s favour. Why is that? Because if he had instead invested lumpsum in January, his purchase cost would have been Rs 11.00 as opposed to the average purchase cost of Rs 12.45 over a 6-month period.


SIPs in a falling market

Month of investment	NAV (Rs)	No. of units
January	11.00	45.45
February	12.00	41.67
March	12.50	40.00
April	12.90	38.76
May	13.25	37.74
June	13.40	37.31
July	12.10	41.32
August	11.20	44.64
September	10.30	48.54
October	10.10	49.50
November	10.50	47.62
December	10.20	49.02
Avg. purchase cost of 12 SIPs	Rs 11.50

However, if the investor had opted for a longer investment tenure of say 12 months, he could have benefited from greater fluctuations in the mutual fund’s NAV. These fluctuations which arise over a market cycle lower the average purchase cost of the SIP over the long-term.

This is apparent from the above illustration. As is evident from the table, if the investor had taken an SIP for 12 months (instead of 6 months) his average purchase cost would have declined to Rs 11.50. Compare this with the average purchase cost of Rs 12.45 for a 6-month SIP.

It can be argued that there is no way for the investor to know when there is likely to be a turnaround in the markets (in this case a downturn). That is exactly our point. Since the investor does not know when markets will fall (and lower his average purchase cost), he must opt for a longer SIP tenure. Or at least he must manage his investments in a manner so that when his existing SIP terminates without witnessing a dip in stock markets, he can extend it further. This way should the markets fall, his SIP can benefit from a dip in the mutual fund NAV which in turn will lower his average purchase cost.

Points to remember before opting for an SIP

1) Ironically, while SIPs are meant to eliminate market-timing, investors must opt for a long-enough SIP tenure so as to ‘time’ the market downturn.

2) SIPs are equally beneficial in a falling market. Most investors believe that lumpsum investments (as opposed to SIPs) prove more beneficial in a falling market. This is only partly true. Having an SIP in operation during a falling market can ensure that investors stand to benefit should markets fall even further.

Short Term Capital Loss

According to Section 74 of the Income Tax Act, 1961, you can offset your losses and even carry forward them for eight assessment years immediately succeeding the year in which the loss was first computed.
As per the act, any loss related to a short-term capital asset (like the sale of equity funds/shares within one year), can be set off against income under capital gains in respect of any other capital asset (be it short-term or long-term). This means, you can even offset this loss against any long-term capital gain. For instance, let's say you invested in a debt fund. After a year, you sell the units and book a profit (long term capital gains). You can offset this gain with your short-term mutual fund investment loss.