Stock Investing For Dummies

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Stop-Loss Orders for Your Stock Investments

A stop-loss order (also called a stop order) is a condition-related order that instructs the broker to sell a particular stock in your investment portfolio only when the stock reaches a particular price. It acts like a trigger, and the stop order converts to a market order to sell the stock immediately.

The stop-loss order isn’t designed to take advantage of small, short-term moves in the stock’s price. It’s meant to help you protect the bulk of your money when the market turns against your stock investment in a sudden manner.

Say that your Kowalski, Inc., stock rises from $10 to $20 per share and you seek to protect your investment against a possible future market decline. A stop-loss order at $18 triggers your broker to sell the stock immediately if it falls to the $18 mark. If the stock suddenly drops to $17, it still triggers the stop-loss order, but the finalized sale price is $17.

In a volatile market, you may not be able to sell at your precise stop-loss price. However, because the order automatically gets converted into a market order, the sale will be done, and you’ll be spared further declines in the stock.

The main benefit of a stop-loss order is that it prevents a major loss in a stock that you own. It’s a form of discipline that’s important in investing in order to minimize potential losses. Investors can find it agonizing to sell a stock that has fallen. If they don’t sell, however, the stock often continues to plummet as investors hope for a rebound in the price.

Most investors set a stop-loss amount at about 10 percent below the market value of the stock. This percentage gives the stock some room to fluctuate, which most stocks tend to do from day to day. If you’re extra nervous, consider a tighter stop-loss, such as 5 percent or less.

Please keep in mind that this order is a trigger and a particular price is not guaranteed to be captured because the actual buy or sell occurs immediately after the trigger is activated. If the market at the time of the actual transaction is particularly volatile, then the price realized may be significantly different.

Stocks Articles

10 Ways to Profit in a Bear Market

Bear markets are brutal when they hit. Ask any stock investor who was fully invested in stocks during 1973–1975, 2000–2002, or 2008. You relieve the pain from the carnage by vigorously pulling your lower lip up and over your forehead to shield your eyes from the ugliness. Fortunately, bear markets tend to be much shorter than bull markets, and if you’re properly diversified, you can get through without much damage. For nimble investors, bear markets can provide opportunities to boost your portfolio and lay the groundwork for more long-term wealth-building. Here are ten ways to make bear markets very bear-able (and profitable).

Find good stocks to buy

For the investor, the strategy is clear. If the stock of a good, profitable company goes down, that presents a buying opportunity. Translation: Good stuff is on sale! Here’s where some basic research yields some diamonds in the rough. When you find companies with good sales and profits and a good outlook and then you use some key ratios, you can uncover a great stock at a bargain price (thanks to that bear market).

Hunt for dividends

Unearth gems with bond ratings

If the economy is in bad shape and stocks have been battered, and if you see a stock whose company has a bond rating of AAA, that may be a good buy!

Rotate your sectors

Go short on bad stocks

Going short is a risky way to bet on a stock going down. If you’re wrong and the stock goes up, you have the potential for unlimited losses. A better way to speculate on a stock falling is to buy long-dated put options, which gives you the potential to profit if you’re right (that the stock will fall) but limits your losses if you’re wrong.

Carefully use margin

Notice the phrases “after they’ve corrected” and “dividend-paying stock.” Both phrases are intended to give you a better approach to your margin strategy. You would hate to use margin before the stock corrected or declined because the brokerage firm wants you to have enough “stock collateral,” so to speak. Using margin at the wrong time (when the stock is high and it subsequently falls) can be hazardous, but using margin to buy the stock after a significant fall is much less risky.

Buy a call option

Stocks Articles

What to Consider When Buying Put Options in Stock Trading

When you buy a put option, you’re hoping that the price of the underlying stock falls. You make money with puts when the price of the option rises, or when you exercise the option to buy the stock at a price that’s below the strike price and then sell the stock in the open market, pocketing the difference. By buying a put option, you limit your risk of a loss to the premium that you paid for the put. If, for example, you bought an ABC December 50 put, and ABC falls to $40 per share, you can make money either by selling a put option that rises in price or by buying the stock at $40 on the open market and then exercising the option, thus selling your $40 stock to the writer for $50 per share, which is what owning the put gave you the right to do.

Put options are used either as pure speculative vehicles or as protection against the potential for stock prices to fall. When you buy a put option, you are accomplishing essentially the same thing as short selling without some of the more complicated details. Put options also give you leverage because you don’t have to spend as much money as you would trying to short-sell a stock.