The following article on stop loss orders is the first lesson in a series of money management tips I will be writing this month.  These are meant to help you become a smarter investor.  If you have any questions, send an email on the contact form above.

Stop Loss Orders

I should probably start out by telling you that I am not an active trader.  I place trades when I need to; however, this article can be good for any type trader because using and/or at least knowing about stop loss orders should improve your money management skills.

When the bottom falls out of a stock’s price while you are on vacation or away from your computer, having a stop loss order on file with your broker can help ease the loss and headache.   They aren’t perfect and do sometimes fail to achieve the objective however, ultimately, they are useful when used correctly.

When you place a stop loss order, you are leaving instructions with your discount broker to sell when the stock trades a certain price.  The purpose of the stop loss is obvious – you want to cut your losses before your stock falls any further.  A “regular” stop loss order creates a “market order” once your set stop price has been trades.   It should be noted that your order gets executed at the next market price, which is often times below your stop price.

Here are the basics of a stop loss order: You instruct your discount broker that you want a stop loss order at a certain price, say 1000 shares at $20. When, and if, the stock hits $20, your stop loss order becomes a market order, which means your discount broker sells the stock at the next market price available immediately.  This could be $20 or it could be $19, or even $15. If a stock is falling fast, you could really see a big difference in the price of your stop order and your executed price.

As a money management technique, some people use a trailing stop (a certain percentage below the market price – say 10%, 15%, etc) as a way to safeguard profits.  Of course you have to adjust the stop price periodically for market volatility.

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