SolveYourProblem
Article Series:
Learn Stock Market Trading Tips
What
is a Stop Loss Order?
With a stop loss order, it is necessary that
you thoroughly understand market orders so that you will not
become confused. As a reminder, a market order is simply instruction
from your stockbroker to either purchase or sell as certain
stock. When a stop loss order is placed it instantly
becomes a market order when a pre-calculated price is reached. At that
point, the typical rules of a market order come into effect,
meaning that the order is virtually guaranteed to be executed.
The gamble here is that you don't know the price. Because you
have set a predetermined price, and the stock has reached that
point, it does not guarantee that by the time a stop loss order
is placed that it will be that price. The tricky part of a
stop loss order is that a certain stock may reach the predetermined
price, however, because the stock market fluctuates, by the
time the stop loss order is placed, the stock price could have
increase or decreased.
Investors
choose to use the stop loss order in two distinct situations. The investor may use a stop loss order in order
to try to reduce the amount of loss that could occur. For example,
you purchase 500 shares of stock from Target, a discount store
chain, and at the time of purchase you place a stop loss order
on the total amount of stocks. Then, you predetermine that
you will not sell any of your 500 shares of stock from Target
until it gives you a total profit 75% higher than the purchase
price. Let's say that all 500 shares of stock from Target cost
you $95 each, for a total of $47,500. You are not allowed to
sell these stocks until you make a total profit of $78,375.
So, after 5 months of owning 500 shares of stock from Target,
you earn that total profit and you sell your 500 shares of
stock from Target. By the time the transaction occurs, each
stock drops in profit by 25%, therefore, you just saved yourself
from losing a return on your investment. The other reason that
an investor may choose to place a stop loss order is to protect
their profit. You, the investor, are only willing to lose a
certain amount of you initial investment, so you place a stop
loss order on your purchase.
For example, you decide to buy 25 shares of stock in Company
Z, which are priced at $1.00 each, for a total investment of
only $25.00. You set a stop loss order on this stock purchase
by determining that you are willing to lose only 20% of this
total investment. Therefore, when you have lost a total of
$6.25, then you are able to sell you stock to ensure that you
will not lose any more profit due to the decreasing profits.
As
with the trailing stop order, the main advantage of the
stop loss order is that you do not have to monitor your purchase
on a daily basis. Because you have set a predetermined amount,
when it is reached, the action of buying or selling will take
place. Therefore, if you hold a demanding full time career,
you do not have to watch the stock market daily in order to
keep up with each of your purchased stocks.
The main
disadvantage to keep in mind is that when your stop
price is reached, buying or selling does take place, even if
you have changed your mind and you want the investment to remain
the same. This can be detrimental if a stock has shown no losses
over a period of time. For example, you purchase 30 shares
of stock from Company T and you place a stop loss order on
it at the time of purchase. As time elapses, you discover that
Company T's stock has shown no losses but has instead should
a steady gain in profits. However, the stock has reached the
stop price, so you must now sell a profit bearing stock. Thus,
in the long-run, because you had to sell this particular stock,
you are losing money on your investment.
This stop loss order can provide a massive amount of saving
your profits, however, if used when not necessary, you will
end up losing more money than you have gained. # # # # # SolveYourProblem.com : 2007
> Home > Stock
Trading: Main Page
|
