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Stop Loss and Trailing Stop For those of us who have better things to do than stare at the computer all day long, refreshing that page that we use to monitor the market; there are options. Number one, you shouldn't be doing that to start with. Don't worry; you are not alone. Many people become obsessed with the current price of whatever stock they are keen on. I am among those who have done that. Madly refreshing the page, muttering c'mon. c'mon, what is taking so long? That's the path to madness. I'm only partly joking when I say that. The other thing you can do is set up a stop-loss or a trailing stop (AKA trailing-stop-loss.) These two tools have saved many an investor. Both of these are preventative measures to keep a loss minimized in the event of an unexpected drop in price. Both of them can be modified pretty much however you want them, depending on the service you use. I know the major on-line services, E*Trade, AmeriTrade, Schwab, all offer customizable stop-loss features. The way these work is that you can decide a specific price you want to sell at if the stock price drops. This is called a stop-loss. I'll use this example; if you bought REB company, 100 shares at $100 per share, you could put in stop-loss order at $90. This way you couldn't lose more than 10% of your investment. You can make that any number you choose, but remember stocks do rise and fall, and you have to be willing to 'ride' a little bit. If you put your stop-loss too close to the buying price, you might as well not buy in the first place. The second thing I am going to talk about is the trailing-stop. This works in much the same way as the stop loss, but instead of setting a dollar amount, you set a percentage of loss. This means that as your stock price rises, you stop loss point also rises. For example, the same stock, same scenario. REB Co. rises to $140 per share. You are elated. The company is doing well. The future looks bright, but you still want to cover your assets. You have placed a 10% trailing-loss on the stock. This means (at this point) if the stock drops $15, your stock will sell. (the $15 is 10% of the $150. Don't get confused thinking that the 10% is the original $10 - 10% of the $100 buy price.) This means that you would end up $35 ahead, with your stock, purchased at $100 is now sold for $135. On the other hand if the stock continues to climb, you still have that 10% safety net, without monitoring the price personally. If it goes to $200, your net would be at $180, and so on...
Hopefully this information will give you a little more to work with, or at least something to think about. The trailing-stop and the stop-loss are both very useful tools to protect your investments.
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Want a scholarship into the Millionaire Mind Intensive worth $2590? http://www.secretsofthemillionairemind.com The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy copyright Robert E. Britt 2006 |
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