In the world financial industry, stop loss is one of the most important variables that are taken into account by businesses. The term is defined as a set limit towards a loss that has occurred due to certain price movements. On the other hand, stop loss in the insurance industry is referred to as the provision written in the policy that shows the limit of the insurer’s losses towards a certain point. The purpose of stop loss is to control losses to the company and the investors from any changes in the industry prices. Through a stop loss, the company and the investors would be able to take control on the specific amount of possible losses.
Another set of major advantages is that the investors may possibly gain major benefits which will include the capability to minimize loss and control potential losses, lesser need to monitor investments manually and the method checking provisions in the settling of the price indicated as cases may occur. With stop loss, there are no additional charges that will be bestowed above or beyond the indicated amount as to the premium in insurance and to the stock market of the investors. Prior to these benefits, stop loss is highly recommended to be utilized first and foremost in any financial institutions to prevent and reduce these potential losses.
Aside from limiting losses, stop loss can also be a good tool to lock in some profit. If the investor had already bought a share with affixed price, and the stock price keeps on increasing its value, then profits are already gained. In terms of the insurance policy, once a policyholder had already a stop loss on its policy, then the insurer is said to be responsible only on that said limit. For instance, if one of the policyholder’s unfortunately met and strangled an unfortunate accident which involved major losses on the vehicle and the people surrounding the accident, the coverage of losses and damage of that said event, depending on what type of insurance, will vary from the stop loss indicated on the insurance policy agreed upon between the insured and the insurer. Beyond that stop loss is already a gain to the insurer in terms of the earned premium coming from the premiums paid by the insured.
However, there are certain disadvantages and restrictions that the stop loss may provide and that investors might possibly encounter. It is significant that these investors will be aware of the short term changes in terms of their shares that are most likely to be encountered to be able to sustain the investment in a longer term. The same as the insurance policy, the insurer and the insured should both be aware of this stop loss. Insurance providers should always lay all the facts to the client and the client should be clever and be a keen observer enough to be able to avoid misunderstanding that might end up suing the company for the felt fraud.