The Stop-Loss Order

A stop-loss order is a useful investing tool that's lost some of its usefulness. Basically, a stop-loss order tells your stockbroker to sell a stock when the price falls to a pre-set level. It still works well in most situations, but it generally only works when the New York Stock Exchange is open

“Never invest in any idea you can’t illustrate with a crayon.”

—Peter Lynch

A stop-loss order is a useful investing tool that’s lost some of its usefulness. Basically, a stop-loss order tells your stockbroker to sell a stock when the price falls to a pre-set level. It still works well in most situations, but it generally only works when the New York Stock Exchange is open—Monday through Friday from 9:30 a.m. to 4 p.m. Eastern Time.

In today’s round-the-world, round-the-clock trading environment, however, the stop-loss order has lost some of its muscle. The trouble can start if the stock falls below the stop-loss price during after-hours trading. Since most after-hours trading sessions don’t handle stop-loss orders, the order will be executed on the next trading day at the price of the stock at the opening bell. If a stock goes into free-fall overnight, you could face a far larger loss than you looked for when you put the stop-loss order in place.

Stop-loss orders can also lock in losses as solid companies suffer temporary drops in their stock price. More useful, say market mavens, is a “trailing stop” that investors can use to lock in profits. As the stock price goes up, an investor sets stop-loss level upward to keep any profits safe from a subsequent drop in price.

48%

Percentage of US households that say their financial condition has worsened in the past year.

(Harris Poll, 2008)

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Trailing-Stop Techniques