Question:
During the Covid-19 crisis, can I avail of a stop loss order?
Answer:
In the name of Allah, Most Compassionate, Most Merciful,
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
A stop-loss order is a way of mitigating loss during a market crisis. A stop-loss order is an order placed with a broker to sell a security when it reaches a certain price.
For example, ‘Amr purchased the shares of a company at $5 a share. As ‘Amr sees the market is slowly crashing, he places a stop order at $4.50. Hence, if the market begins to fall and his stocks drops below the stipulated stop price, $4.50 in this example, his stock will be automatically sold on the market at the next available price.
In such an agreement, the broker does not guarantee the final sale price. Thus, the sale of the share may take place well below the stipulated stop price.
The benefit of such an order is that it saves a person from constantly monitoring the market. In the absence of such an order, the prices would keep declining while the broker would only sell the shares upon the order of the shareholder. The order thus allows the shareholder to minimize his loss.[i]
