Another story I wrote in the old days when I was a stock trader and not an Index Investor.
I have talked about the amount of money that I lost in the 2000 tech bubble implosion, many times, but out of that I learned the importance of PROTECTING your profits and having a plan in place to make sure to limit your losses.
I trade with TD Waterhouse and they have a Sell Stop action available so there is no excuse not for me to have this weapon in my investing arsenal. It is only limited to a 30 day span, which annoys me, since I have to “renew” it every month, but maybe that is a good thing as well.
To understand the idea of a Stop Sell, just think of it as the lowest value of the stock that you are willing to take before you figure it is time to get out, and cut your losses. Say you chose a High Tech firm like Nitsel (fictional) and you figured that if they started selling for less than $20 a share that they might just go into free fall and be worth even less very quickly, and you didn’t want to lose any more money on them (say you bought their shares at $30 per share). You would go into your on-line broker and set up a stop sell for $20 for all (or some) of the shares and an end date for this trade.
What happens next? If the stock never goes below $20 per share, nothing and you don’t pay anything either, the order will expire after the end date and it will be forgotten. If the shares do drop below $20, however, a SELL order will be placed as soon as possible (you may get below $20 if the order couldn’t be processed fast enough), you will be charged your regular brokerage fee and you will have your cash from the sale. This means you will lose no more than that amount and you won’t have to constantly watch your portfolio to make sure your stock isn’t in free fall, you have set up a tool to stop the fall.
Now there are a few pit falls such as if the stock only “dips” below the price and rebounds, your SELL will activate and you will be “out” of the stock, and you might regret that, but that is the price you pay for safety and peace of mind. If you are confident that the stock is strong and may have a dip, then don’t put in the Stop Sell Order (but remember you are leaving yourself open to losses, if you don’t keep watching).
Tomorrow, Stop buy?
Maybe, but at some point you have got to put your “dog” stocks down, and this was the last chance for that stock.
–c8j
I’d entertained the idea of using stop losses against overvalued non-dividend paying stocks. Wish I did just that with Petro Canada. 🙁
I’d never apply stop loss below my purchase price. If it’s good enough for me at $20, it’s even better at $15.