Making the right decisions for your stock investments is not easy; that’s a safe bet. Utilization of different strategies results in different conclusions. In order to be successful, a smart investor will learn which tool to use in which circumstance.
Stop Loss Orders
Two types of Stop Loss Orders are “sell-stop” and “buy-stop.”
stop loss orders are used to protect long positions (stocks intended to be held for a long time period). The benefit of instituting a sell-stop loss order is to minimize your investment risk. You set a price point (often 10% of the stock price) that you don’t want the price of the stock to go below. If you buy a share of stock at $30.00, using the 10% assumption, your order would be to sell if it goes below $27.00 per share. This would seriously minimize your risk of loss if the stock were to continue to decline to, say, $5.00 per share.
stop loss orders are extremely similar except they are used for short positions (stocks meant to be held for only a short period of time). A buy-stop order will trigger if the stock purchased rises above the amount paid for it.
Stop Limit Orders
While Stop Limit Orders are “similar” in nature to Stop Loss Orders, there is a limit put on the price at which they will react. Two prices are affected in a stop-limit order: the “stop price” that triggers when an order is sold and the “limit price.” A “limit order” is one designed to sell or buy a “set” number of stock shares at a “specific” price … or better. A limit order may not be acted upon if the price desired by the investor is not met within a specific time period because it is not a true “market order.”
When To Use Which?
There are benefits and risks to both Stop Loss Orders and Stop Limit Orders. They both serve different purposes for different types of investors. While Stop Loss Orders guarantee a certain action (that a market order will be sent to sell the stock when it reaches a certain price), the “exact” price when the stock actually sells is not guaranteed. On the other hand, Stop Limit Orders can guarantee a price limit but they do cannot guarantee that a trade will actually be carried out.
Choosing which type of order is best for you in any given situation requires examination of your goals and your financial wherewithal. You need to answer the question: what type of investor are you? Start with StopLossTracker’s free 30-day trial of their investment management system.