What Is Target Price And Stop Loss?

Target price and stop loss terms are commonly used in investing and trading to manage risk and set profit-taking objectives:

Target Price: This is the price level at which an investor or trader aims to sell the security to make profits. This is the expected price level based on analysis or a predetermined profit target. For example, if you buy a stock at $50 and you believe it will rise to $60, $60 is your target price. Once the stock reaches this level, you can choose to sell to lock in your profits.

Stop Loss: This is an order given to the broker to sell a security when it reaches a certain price level. It is used to limit the potential loss on a trade. Basically, it is a mechanism to protect your capital. For example, if you buy a stock at $50 and set a stop-loss order at $45, if the stock price drops to $45 or lower, your broker will automatically sell the stock, allowing your preset limit. More damage can be prevented.

Both target price and stop loss are important tools for managing risk and maximizing profits in trading and investment strategies. They help investors and traders stay disciplined and stick to their trading plans.

Meaning of Target Price

"Target price" generally refers to the anticipated or desired price level at which an investor or analyst believes a security (such as a stock) will trade in the future. It is a projection based on various factors including fundamental analysis, technical analysis, market trends and other relevant information.

Here are some key points about guide pricing:

Investment Analysis: Target prices are often calculated as part of an investment research report or analysis. Analysts or investors may use a variety of methods to arrive at a target price, such as discounted cash flow analysis, analysis of comparable companies, or technical chart patterns.

Profit Target: For investors or traders who own a stock, the target price represents a profit target. Once the stock reaches the target price, they can choose to sell it to realize their profit.

Decision Making: Target prices help investors make decisions about buying, holding or selling securities. If the current market price is significantly lower than the target price, it may signal a buying opportunity. Conversely, if the current price is close to or above the target price, it may decide to sell.

Risk Management: Target prices are often used with stop-loss orders to manage risk. Investors can set stop-loss orders a certain percentage below the target price to limit potential losses if the investment does not perform as expected.

Overall, target prices serve as a guide for investors and analysts, providing insight into the potential future value of a stock based on their analysis and projections. However, it is important to remember that target prices are not guaranteed and actual market prices may vary due to various factors and uncertainties.

Meaning of Stop Loss

A "stop-loss" is an order placed with a broker or trading platform to sell a security when it reaches a specified price level. It is primarily used as a risk management tool to limit potential losses on an investment or transaction. This is how it works:

Loss protection: When an investor or trader enters a stop-loss order, they specify a price at which they are willing to sell the security if its price moves against their position. This helps protect their capital by avoiding losses beyond a predetermined limit.

Auto-Execution: If the market price of the security falls at or below the specified stop-loss price, the stop-loss order is triggered and the broker automatically sells the security at the current market price. This means that the investor does not need to actively monitor the market and manually execute a sell order if the price moves unfavorably.

Risk Management: Stop-loss orders are an essential part of risk management strategies for investors and traders. By setting a stop-loss level, they define the maximum amount of loss they are willing to accept on a particular trade or investment.

Psychological benefits: Stop-loss orders can also provide psychological benefits by helping traders stick to their trading plans and avoid making emotional decisions. Knowing that there is a predetermined exit point if the trade goes against them can reduce anxiety and help maintain discipline.

It is important to note that although stop-loss orders can help limit losses, they are not foolproof. Under certain market conditions, such as sharp price fluctuations or gaps, a stop-loss order may be executed at a price significantly different from the specified stop-loss level, a phenomenon called slippage. Additionally, in thinly traded markets or during periods of extreme volatility, stop-loss orders may not be executed at all or may be executed at worse prices than expected. Therefore, investors should

carefully consider their risks and limitations when incorporating stop-loss orders into their trading strategies.

What is the trigger price in a stop loss order?

The "trigger price" of a stop-loss order, also called the "stop price" or "activation price", is the price level at which the stop-loss order is activated and its execution begins. This is the critical point at which the stop-loss order moves from being passive to being actively monitored by the broker or trading platform for execution.

Here's how the trigger price works in a stop-loss order:

Setting the stop price: When placing a stop-loss order, the investor or trader specifies both a trigger price and a limit price. The trigger price is the price level at which the stop-loss order is activated, while the limit price is the minimum price at which the investor is willing to sell the security after the stop-loss order is triggered.

Activation of stop-loss order: If the market price of the security reaches or falls below the trigger price, the stop-loss order is triggered and it becomes active in the market. At this point, the broker or trading platform begins to monitor the market for possible execution of stop-loss orders.

Execution at or above the limit price: Once the stop-loss order is triggered, it will be executed at the current market price or at the limit price specified by the investor, whichever is more favourable. Limit price ensures that the stop-loss order is not executed at a price lower than the limit specified by the investor.

Risk Management: Setting appropriate trigger prices is important for effective risk management. This determines when the investor is willing to exit the position to limit potential losses. The trigger price should be chosen carefully based on factors such as the risk tolerance of the investor, market volatility and technical analysis of the security's price movements.

In essence, the trigger price of a stop-loss order acts as the order's activation point, which triggers the process of monitoring and potential execution to help manage risk and protect capital in trades and investments.

What Is Target Price And Stop Loss?