Quote:
Originally Posted by JKnight
Hey Greg, you're doing a great job of passing along quality information in a way that can be digested by the masses. While this may be an investing 101 topic, I would think the quote above could be a great reason to integrate a discussion on the use of, and strategy behind, limit orders, stops and trailing stops. Particularly as it fits in with your overall investing strategy...
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Thank you... I'm trying to keep it simple enough that no one is left behind.
Limit orders - stops and trailing stops are something I never use.... so while I certainly understand them and will explain them here I don't think they're a good strategy for Investors 102...
Limit orders is a price you pick when placing a purchase order. And there are several factors you can choose when placing a buy order - limiting the price you are willing to pay - vs "market order" - and also the time frame you're willing to place on an order - good til filled - fill or kill etc. You can even specify fill all or none etc. These are fine "limits" but for our purposes - we just want to own the stock - and a few pennies one way or the other isn't going to make much of a difference.... thus I've left this out of the discussion.
If I don't use this to buy 10,000 or 20,000 shares at a time.... I don't see how it's particularly useful buying 50 / 100 / 500 shares. While setting a limit order price could save you .50 or even maybe a 1.00 per share (on a stock that moves like that) many times you can set a limit and not buy the stock because it never traded that day at your limit price.
Stop orders are a price you choose in advance - telling your brokerage that if it gets to this point sell it... It's kind of a short for "stop loss"... which is just picking a price at which you'd rather sell the stock than hold it should it fall below your chosen price.
Again - for our purposes - the last thing we'd want to do is to get "stopped out" (the stock hits your stop price and is sold out) - and then loose our dividend in the process.... just because for one day or one week - or even for 3 months - the price is lower and meets some pre picked price. Remember -- that for our purposes - we actually want to BUY more stock at lower prices! We want that dividend to buy more shares... And I just don't think that stop loss orders have a place in "Investing 102". These are sophisticated strategies for people that are gambling rather than investing.
If someone is interested in learning these strategies - and there is no doubt that they can be used and in certain instances maybe should be used - there's a ton of information about them on the discount brokerages websites.
If you're really fearful of the stock market -- and wanted to put in stop losses on your stocks - you could just set some price on each stock that when they got to 10% below your cost you'd get sold out...
Guaranteed --- at some point you'll be sold out... and a week later or a month later the stock is higher and you're left shaking your head holding a 10% loss on a stock you wanted to own for 2 /3 /5 years... and now you have to go back and re-buy it... and then maybe miss the "ex" date for the dividend in the process....
If you're a real sophisticated guy - and you're watching your account minute by minute - and have all day every day to fuss around with this kind of stuff... it's fine. Me? I buy good stuff - year after year it goes a little higher - and those checks just keep buying me more car crap....
