Use The Right Stock OrdersDo you suffer from “how do I place stock orders” syndrome? Relax, you’re not alone. Knowing when to choose a limit order, stop loss, or buy stop limit can get confusing. It’s not like the terms themselves tell you what to do. The easiest trade to place is the market order. Find a stock you like, hit buy, and away you go. The stock may have been at 12.75 right before you placed the order. As you wait in suspense to get your trade confirmation, you find out you paid $13.00. Depending on your time frame or how many shares you bought, this may not bother you. After you own the stock, preventing losses is a different story. If your stock should drop to $11.05 you may be in trouble. Your shares dropped 15%. Now your shares will have to rise more than 15% to break even & cover commissions. Wall Street is kind enough to invent ways to keep those loses to a minimum. Thinking “it’ll have to turn around eventually” is a mindset that will have the Stock Police take your account away. Placing the right stock orders is easy. Easier than picking the stock you chose to begin with. For some reason after hitting the “buy” button, many investors feel they’re done. Once you place that trade your stock is in the hands of the market. And that can be a nutty place to be. Consider stock orders your body guards. Buy Stop Limit Order: This type of order is placed above the current market price of the stock. It says, place my buy order when the price hits a certain level (activation price). But but do not buy above the highest price I’m willing to pay (limit order). Let’s do an example: Ebay is currently trading at $35. You set your activation price at $37. Your limit price at $38. Once Ebay crosses $37 your order hits the market. Your order will only be fulfilled as long as the price stays under $38. If the market is going crazy and Ebay hits $39 before fulfillment, you won’t get the stock. The thing I like about this strategy is twofold. If you’re buying a stock, you want strength. Having the stock step up to your purchase level is confirmation the price is at least rising. And by limiting how much you pay, prevents you from paying too much.
Pardon me. I was having a Bartiromo moment. Buy Stop Market Order Similar to the Buy Stop Limit order. Once your activation price is hit your order becomes a market order. You get fulfilled at the next available price no matter what it is. If the market is volatile you could end up with a price you didn’t expect. Stop Loss This stock order is used to protect the stocks you own in case the market drops. Example: You own Ebay and it’s currently trading at $39 per share. You place an order in which as soon as Ebay reaches $37 (activation price), it is to be sold at the market ASAP. There’s no official level at which to set a stop loss. The levels I’ve been hearing are between 8 – 10% under what you paid. If you're a Bill O'Neil enthusiast, then you sell your shares at 8% below your purchase price. Don't question the Master. Just do it! As your stock rises, keep moving the stop loss up to protect the gains. If you want a stock order that "covers" a rising stock for you…may I suggest the trailing stop order. The Trailing Stop Order: A stop loss can be initiated in two ways. You can set the stop loss with a dollar value. If your stock is at $27, you can set your trip wire to sell at $25. What if your stock is rising? Let’s say you bought Yahoo! at $24. After a couple months it’s at $30. Not a bad run. You could sell your whole lot and enjoy the weekend. However, if you feel Yahoo! can break $40 the hang on. Consider setting the trailing stop order as a percentage. For example, you can set a stop loss to sell Yahoo! if it drops 10% from the current market value. If the stock continues to rise, the 10% sell order travels with it. You’re profits are protected. The trick is to determine the right percentage so you don’t get stopped out by daily fluctuations. Now you can focus on work without checking your stock all day. What a relief. If you're like me, you'll check your price anyway.
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