TEXAS, USA — It seems like when the stock market goes upside down, sideways and backwards, experts say if you’re in it for the long term, just leave it alone. And they have a point.
Over the long arc of time, the market has steadily risen. But after a recent steep drop, one former financial advisor said something different.
The advisor said maybe you should consider selling some of your stock, but that it is important to at least figure out now how low you are willing to let a stock drop before it makes you uncomfortable.
So, this is a good starting point for a new year-long series of reports called “Right on the Money: How 2 in ’22," where WFAA will share “how-to” information about a variety of money-related topics.
The stock market is always rollercoaster, but lately, the thrill ride has been especially wild, with some precipitous drops.
If you are an amateur investor, and you have been constantly logging into your account to figure out what to do about your stocks, especially on down days, it might be a good idea to consider the types of trades you have been making.
Have you limited yourself to market orders? Perhaps you usually select that when asked what type of stock order you’d like to make. In some cases, “market order”, may be automatically selected by default. This kind of order will usually be filled immediately after you confirm a trade.
Stop loss orders
If you have bought shares and you are constantly worried about how much they might fall before you have to intervene and place a market order to sell those shares, a stop loss order may be a useful tool.
This kind of order lets you decide how much pain you are willing to take before you choose to dump your position in a stock.
Let’s say you own a stock valued at $10 apiece. Will you be okay if it goes down to $9.50 per share? $9.33 per share? Maybe $8.99 per share?
Find the price that might make you blurt out “stop it from falling anymore!” That can be your stop price.
To set that, you can go into your brokerage account and opt to sell that stock. You choose the quantity you would like to sell and choose to do it as a stop loss order. You will be prompted to set your stop price (again, that’s the lowest price you would want to tolerate before deciding to sell the stock).
Let’s say you set your stop price at $8.99. If the stock falls from $10 down to $8.99 or below, it triggers an order to sell your shares.
But this is not a foolproof protection from further losses. Sometimes, stocks go into a rapid freefall.
What if the stock plunges from $10 to $5 in a matter instantly?
Even though the automatic order to sell your shares had triggered at $8.99, by the time that order actually executes, the stock may have already plunged to $5, leaving you with greater losses than you had planned.
Stop-limit and trailing stop orders
There is also a stop-limit order. This one works a lot like a stop loss order, but also allows you to choose a limit–where you specify the stock will only be bought or sold at a price you choose (or better).
And there are trailing stop orders. These are stop orders that can keep adjusting as the stock moves up or down.
The Securities and Exchange Commission describes it like this:
1. You buy XYZ stock at $20 per share.
2. XYZ rises to $22.
3. You place a sell trailing stop order with a trailing stop price of $1 below the market price.
4. As long as the price moves in your favor (i.e., increases, because here you are looking to sell it), your trailing stop price will stay $1 below the market price.
5. The price of XYZ peaks at $24 then starts to drop (not in your favor). Your trailing stop price will remain at $23.
6. Shares are sold when XYZ reaches $23, though the execution price may deviate from $23.
That and more information on stop loss, stop-limit, and trailing stop orders from the SEC can be found here.
Here is even more information on stop loss orders, stop-limit orders, and trailing stop orders.
